Posted on: Friday, January 14, 2005

U.S. housing market expected to cool

By John Handley
Chicago Tribune

ORLANDO, Fla. — The brightest star of the nation's economic expansion in the past three years will start to fade in 2005, economists told builders and other members of the housing industry gathered here yesterday for their annual convention and trade show.

"Housing, the powerful growth engine for the nation's economy, will be a modest drag this year," said David Seiders, chief economist of the National Association of Home Builders, sponsor of the International Builders' Show, attracting 90,000 members of the home-building industry through Sunday. Other experts saw a drop-off in mortgage originations and a cooling of home price appreciation, but also less upward pressure on building material costs. Though home sales may ease, solid growth was seen in remodeling, thanks to a record amount of equity available for home improvements.

"This year, housing likely will pass the baton as the leader of the economy," Seiders said.

"Housing starts will fall 3 percent to 4 percent this year," Seiders said. His forecast calls for 1.8 million housing starts in 2005, down from 1.9 million in 2004, thanks to rising mortgage rates.

David Berson, chief economist for Fannie Mae, the mortgage giant based in Washington, D.C., told builders that interest rates on 30-year, fixed-rate loans will rise from 5.75 percent now to 6.25 percent by year-end. "That will take some of the oomph out of the housing market," he said.

"Home prices rose 10 percent in 2004, but they won't rise as much this year, probably only 3.5 percent. But that depends on the part of the country," he said.

As for the possibility of a price bubble bursting, he said, "There is little possibility for a national decline in housing prices, though declines are possible in some places."

Berson estimated price gains of 4 percent to 4.5 percent. "That rate is sustainable by job growth," he said.

He pointed out one possible red flag: last year's large increase in homes bought by investors and speculators. "If investors start to pull out of the market, that could have a negative impact on housing demand," he warned.

But Seiders saw an easing in builders' costs. "The cost of producing new homes rose sharply in 2004, rising 8 percent to 9 percent. The cost of buildable land also skyrocketed," he said. "But this year builders should get relief from record-high prices for building materials."

Seiders added that positive trends in employment and household income will buoy housing demand this year, while rising interest rates and overinflated house prices in some areas of the country will strain affordability.