Economists offer mixed housing forecast for '04

By John Handley
Chicago Tribune

While an upswing in jobs could keep the home market percolating, higher interest rates could slow purchases. Associated Press

That somewhat mixed view came from three economists yesterday at the National Association of Home Builders annual trade show, which runs through Thursday in Las Vegas.

Though housing levels remain robust, David Berson, chief economist for Fannie Mae, the mortgage giant based in Washington, D.C., said they have slowed from peak levels of a few months ago.

Yet despite mortgage interest rates that are expected to be higher this year over last, that rise "should not be enough to take much of a bite out of housing demand," Berson said.

"By the end of 2004, the labor market should be considerably stronger. We're not predicting it, but this could be the fourth record year for housing in the United States."

Overall, the economists' expectations were modest.

With mortgage rates — always the key barometer for home sales — coming off 45-year lows, new housing starts should drop by as much as 5 percent, they said. They added that a continued moderate rise in home prices and an improvement in the job market are incentives for home shoppers to stay active.

This year will be almost as good as 2003, despite upward pressure on interest rates, said David Seiders, chief economist for the NAHB.

"Interest rates are the key question for 2004," Seiders said. In the past three years, he said, interest rate declines have cushioned the housing market from the potential harmful effects of terrorist attacks, corporate scandals and war.

He believes 30-year fixed-rate mortgages will stay well below 7 percent this year, but could edge up to just over 7 percent in 2005.

But, like Berson, Seiders indicated that stronger job growth could lead to a rise in housing starts in 2004.

Rising family income coupled with low mortgage rates are the critical ingredients needed for the housing market to remain strong, said Frank Nothaft, chief economist for Freddie Mac, the other mortgage giant based in Washington. Both will be at work this year, he said.

In his forecast, slightly higher interest rates will lead to a 5 percent decline in total housing starts to 1.75 million dwellings, he said. He also expects new and existing home sales to drop 3 percent, to 6.98 million homes, he said.

While home starts will be down from 2003 levels, they will surpass 2002, he said.

Housing prices have grown strongest on the coasts, according to Freddie Mac, with prices rising 10.4 percent in California and 8.5 percent in Florida.

Prices rose a more modest 4.8 percent in Illinois from the third quarter of 2002 to the third quarter of 2003.

Fannie Mae's Berson expects a 5 percent increase in new-house prices this year over 2003, with the average house increasing from $243,500 to $255,500.

Despite decreased housing expectations by the economists, home builders see growth this year.

"We're bullish on 2004. No housing bubble will burst this year," said Peter Keane, president of the Great Lakes division of Pulte Homes, based in Royal Oak, Mich.

While he expects a steady performance for home building in the Midwest, he predicts phenomenal growth for Pulte in Southwestern markets — California, Phoenix and Las Vegas — and in Florida.

Also, the relatively new trend of building retirement communities in Snow Belt locations appears to be gaining ground.

"We're looking at four new Del Webb sites in the Chicago area," Keane said. "There also are huge opportunities in Detroit, Cleveland and Indianapolis for age-restricted and age-targeted developments."