Posted on: Tuesday, December 28, 2004

Home prices likely to remain high

By Sue Kirchhoff
USA Today

WASHINGTON — The housing market should slow next year from its recent, blistering pace, but don't expect homes to become more affordable.

Economists, builders and Realtors generally predict 2005 will be another historically strong sales year, though slightly below the record-setting pace of 2004.

Sales of new and existing homes could dip about 5 percent, according to Douglas Duncan, chief economist for the Mortgage Bankers Association. Price increases should moderate to 5 percent to 6 percent from their double-digit pace, including an average 13 percent price rise between the third quarters of 2003 and 2004 alone.

Even at the slower rate, prices would rise faster than forecast inflation and wage growth. Interest rates are expected to rise, which could make it tougher for some to get into the market.

David Lereah, chief economist for the National Association of Realtors, predicts that mortgage rates on 30-year, fixed-rate loans will rise to 6.75 percent from about 5.7 percent now by the end of 2005. Duncan expects rates to rise to 6.25 percent

"I would not anticipate a decline in house prices or even a lot of slowing," Duncan says. "We don't think (any increase) will be double digit, but it might be 5 percent to 6 percent a year."

High home prices

Home builders and real-estate agents say demand is so strong — due to tough zoning laws, higher-than-expected immigration, a firming economy and baby boomers' buying power — that they don't see much moderation ahead.

"Interest rates do not drive the home-building industry," says Donald Tomnitz, CEO of home builder D.R. Horton, which reported a 56 percent rise in net income in the fiscal year that ended Sept. 30. He adds that builders have become much more careful not to carry large inventory, helping to stabilize the market and prices.

Despite warnings from some economists that a dangerous home price "bubble" has developed, a number of builders and real-estate agents don't see rampant price speculation.

A study by the Federal Reserve Bank of New York this month did not see evidence of a bubble, pinning higher prices largely on market fundamentals. It did say an economic downturn could hurt pricey areas on the East and West coasts but added that such price declines in the past have not had devastating effects on the overall economy.

Tim Eller, CEO of Centex, expects his home-building company to increase deliveries of homes by 15 percent to 20 percent next year.

"The fundamental driver is the economic recovery," says Eller, who expects gains from job creation and economic growth to outweigh any impact from rising mortgage rates.

Lereah predicts existing-home sales — the majority of all home sales — will dip 3 percent below the expected total of 6.58 million in 2004. Sales of new homes, which tend to be more expensive, should decline about 4.5 percent. Still, his projections would make 2005 the second-strongest sales year on record.

The Commerce Department said last week that new-home sales fell 12 percent in November from October. Economists said the numbers underscored their predictions for softer sales ahead, but they didn't expect continued sharp monthly drops. Existing-home sales figures come out tomorrow.

Some industry officials are seeing moderation in price increases — especially in hot areas such as Las Vegas, where average prices have increased 40 percent in the past year — but no declines.

"Don't expect prices to go down, just a slowdown in prices going up," says Bob Toll, CEO of Toll Bros., a luxury-home builder. Toll Bros.' revenue grew 40 percent in fiscal 2004.

"Toll Bros. is doing especially well because of a polarization in our society that is creating so much wealth" among those on the upper end of the income scale, Toll says. He points out that wealth is increasing far faster among families making $100,000 a year or more — the firm's target market — than other segments of the population.

Low interest rates

Along with the optimism, and the fact that homeownership has hit records, is rising concern that many households are being priced out of the market. The problem is acute in areas of the East and West coasts with the fastest price appreciation.

But Lereah points out that even with double-digit appreciation over the past several years, the Realtors' overall housing affordability index is positive, especially compared with other periods when high interest rates and a slow economy crimped buying power.

He expects the affordability measure to erode a bit next year but to remain in the comfort range.

"Affordability is very healthy right now, and that raises eyebrows. ... Interest rates are near a cyclical low," Lereah says.