Housing pace expected to ease in '03 record pace but stay solid

Nation's Housing

December 28, 2003|By KENNETH HARNEY

FROM YOUR personal real estate perspective it may not have seemed exceptional, but by virtually every national statistical test, 2003 was the single best year in history for American housing, homeowners and mortgage finance.

Almost everything clicked: Annual records were set in the numbers and dollar volume of resales of existing houses, sales of new homes and the dollar volume of new-home mortgages made by residential lenders.

Mortgage interest rates hit 40-year lows and, more important, stayed there for the year. Appreciation rates in the values of existing homes moderated, but in many parts of the country they were three to five times higher than the growth of the core Consumer Price Index - the national measure of inflation in all goods and services.

Homeowners reaped record gains in their home equity holdings and pulled out more than $100 billion of that wealth to spend elsewhere in an economy that badly needed stimulation.

"This was the best year in housing ever, no question," said David Lereah, chief economist for the largest trade group in the industry, the million-member National Association of Realtors.

The numbers strongly support his case:

6.1 million home sales, breaking the record of 5.56 million set in 2002.

1.1 million sales of newly constructed homes, breaking the record of 1 million.

A record $3.4 trillion in new mortgages, far beyond the $2.5 trillion record set last year, the $2 trillion of 2000, and $1.5 trillion in 1998.

Median prices of houses sold in 2003 grew by 9.1 percent over the previous year. The value of the average existing home nationwide - the vast unsold inhabited housing stock - grew by a more modest 5.5 percent.

Though a handful of areas still saw home values jump by double-digit rates - including the Baltimore metropolitan area - the majority did not. And that was good, because hyperinflation in housing is unhealthy for local economies and never sustainable.

OK, you say, so 2003 may have been extraordinary. But what about 2004? Could it be anywhere near as good? The consensus among housing and mortgage economists is that if the national economy and job market continue on the slow road to recovery, residential real estate should continue to be a solid performer. Not a record-breaker, but solid.

For example, Lereah projects a rise in 30-year mortgage rates in the year ahead to an average of 6.4 percent from this year's average of 5.82 percent.

As a result, according to Doug Duncan, chief economist for the Mortgage Bankers Association of America, total new mortgage volume is likely to fall sharply in 2004 to $1.6 trillion. Virtually the entire decrease will be attributable to refinancings. The refi boom balloon is losing air fast. With many homeowners sitting on recently refinanced home loans - taken out either in 2003 or the previous two years - there just won't be much need to refinance again.

Millions of homeowners - and not just baby boomers - are paying off the last mortgage they'll ever take out on their current house. Duncan has a 5 percent, 15-year fixed-rate mortgage that he says "will probably never be refinanced; I'll just pay it off."

But even assuming interest rates go an estimated half-percentage-point higher than they are today, the cost of mortgage money next year on average will still be in near-record low territory.

Rates of 6.5 percent or 7 percent "may sound high to some consumers" who have short memories or never experienced the 1980s, Duncan said. But in fact they are bargains. He recalls the all-time peak for mortgage rates - 18.2 percent for a 30-year fixed rate home loan in late 1982. Rates have been in double digits as recently as 1990 (10.1 percent), 9 percent in 1991, 8.4 percent in 1994 and 8.1 percent three years ago, in 2000.

So, if a 30-year home loan costs you 6.5 percent in 2004, and your house appreciates by just 5 percent or 6 percent, don't bellyache about it. From a historical perspective, you'll be doing great.

Happy New Year.

Ken Harney's e-mail address is kharney@winstarmail.com.

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