Economists give mixed housing forecast

Job growth critical, they say at homebuilders' show

January 25, 2004|By John Handley | John Handley,CHICAGO TRIBUNE

LAS VEGAS -- Strong job growth could propel the housing market to a fourth straight record year. On the other hand -- after three torrid years -- housing may be ready to slow.

That somewhat mixed view came from three economists Monday at the National Association of Home Builders annual trade show in Las Vegas. The group held a series of meetings last week to discuss housing trends this year.

It expects these building issues to dominate new homes this year:

Lot sizes will continue to get smaller as growth controls cause the amount of buildable land to shrink and land costs to rise.

More than half of all new houses will have 9-foot ceilings, up from the standard 8-foot ceilings of the past.

High-tech features -- audio and theater systems, monitored security and automated lighting -- will gradually filter down from expensive homes to the general market.

Though housing levels remain robust, David Berson, chief economist for Fannie Mae, the mortgage giant based in Washington, 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 than 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 more than 7 percent next year.

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.

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.

The Chicago Tribune is a Tribune Publishing Newspaper.

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