David Lereah, the association's chief economist, said the biggest surprise this year has been the performance of interest rates. "At the end of 2003, most economists expected a gradual rise in mortgage interest rates," he said. "In reality, they declined in the first quarter, shot up during the second quarter and then came back down. The bottom line is mortgage interest rates have been lower than expected, the economy is improving and jobs are being created in an environment of strong housing demand—all favorable factors for record home sales."

Lereah said the 30-year fixed-rate mortgage should gradually rise to 6.4 percent in the fourth quarter. The average rate for all of 2004 is expected to be 6.1 percent, only modestly above last year's 5.8 percent. Nearly 1 million jobs have been created in the last five months, and unemployment is projected to drop to 5.2 percent in the fourth quarter.

"The momentum of existing-home sales this year is unprecedented, rising steadily each month and hitting a new record in June," Lereah said. "In addition, new-home sales have been at or near record levels each month in 2004."

The association forecasts existing-home sales to rise 5.7 percent this year to 6.45 million, well above the record 6.1 million in 2003. New-home sales also should hit a record, increasing 10.8 percent to 1.2 million in 2004. Housing starts are expected to come in at 1.9 million, 2.6 percent above 2003, and would be the strongest level of housing construction since 1978.

The median existing-home price will continue to show above-normal appreciation, rising 7.3 percent in 2004 to $182,400. The median new-home price should increase 8.3 percent this year to $211,100.

Lereah forecasts the U.S. gross domestic product to grow 4.5 percent in 2004. At the same time, the Consumer Price Index is expected to increase 2.8 percent.

Inflation-adjusted disposable personal income should rise by 3.5 percent this year, while the consumer-confidence index is forecast to reach 107 by the fourth quarter.

Home prices in the second quarter increased at a strong rate in most metropolitan areas in comparison with the same period a year earlier, according to the latest survey by the National Association of Realtors.

"A tight supply of available homes in a record sales market has been favoring sellers," Lereah said. "Even so, the low level of mortgage interest rates and loan origination costs are providing the headroom necessary for buyers to handle higher prices in most areas."

National Association of Realtors President Walt McDonald said there is no evidence of a price bubble. "The relatively small number of areas showing price declines have experienced one or both of the factors necessary for home prices to soften—a period of local economic weakness or an abundant supply of homes for sale in those markets."