Propelled by persistently low mortgage rates, the housing industry is celebrating what is likely to be a fourth straight year of record sales. And for a fourth straight year industry executives are cautioning that sales are likely to decline at least modestly in the year ahead.
“Each year we say we can’t do it again better and it won’t happen again better, and it does,” said Dale Mattison, a broker with Long & Foster in Washington, D.C. “Inventory is still low and demand is still high. The demographic and economic impetus in the market is still strong.”
One reason to believe home sales finally will begin falling this year: Long-term mortgage rates seem almost certain to rise given the Federal Reserve’s apparent intention to continue tightening credit. The central bank raised short-term rates five times beginning in June, but so far there has been little effect on 30-year mortgage rates, which are tied to long-term rates set in open markets. But if the Fed continues to raise short-term rates steadily, long-term rates will head higher, analysts say.
“By the end of the year we should see the effects of a Fed tightening kicking in,” said Michael Englund, principal director of Action Economics, a forecasting firm.
Doug Duncan, chief economist for the Mortgage Bankers Association of America, predicted that the average 30-year mortgage rate will rise to about 6.3 or 6.5 percent by the end of 2005 from the current 5.81 percent.
“That’s still a darn good interest rate from a historical perspective, but it’s enough to slow the market somewhat,” he said.
Others predict long-term rates could rise to 6.5 percent by midyear, with a chilling effect on the housing market. But so far there has been little sign that the market’s momentum is slowing.
The past few weeks have been “remarkably busy,” said Terry Hankner, president of Comey & Shepherd Realtors in Cincinnati, who said her firm posted a record year with sales growth “substantially” better than the 12 percent increase seen in her part of Ohio.
Even the upper end homes in the $800,000 to $1 million range “came back nicely” after a sluggish 2003.
Last week, an industry trade group reported that sales of existing homes surged in November to a monthly record, surpassing analyst expectations. That report eased concerns raised after a sharp decline in new-home sales and housing starts, which might have been held down by unusually damp weather.
Typically rising employment and wages can offset a modest increase in mortgage rates, but employment growth has been unusually slow in the current recovery and few analysts expect that pattern to change significantly in the year ahead.
“Our current thinking is that employment growth won’t be quite strong enough to offset the effect of modest upturns in interest rates, but by any measure it will be a good year,” said Duncan of the mortgage bankers.
Not everyone is so sanguine. Dean Baker, co-director of the Center for Economic and Policy Research, long has warned of a growing housing bubble, pointing out that home prices have been rising at an unsustainable rate.
From 1975 to 1995, for example, the median price of existing homes sold rose just 10 percent after adjusting for inflation. Over the past decade the median price has risen 40 percent in inflation-adjusted terms.
If mortgage rates rise by just 1.5 percentage points, Baker figures home values could fall 15 to 20 percent.
“You still have hugely overpriced markets,” Baker said. But the exact timing of a downturn is “very hard to predict,” he said. “This is just like the stock bubble in the sense that there is a psychological element.”
Haseeb Ahmed, a senior economist at Economy.com, notes that the inventory of new homes for sale has risen to 418,000, the highest level since the 1970s. At current sales rates, that is 4.5 months of supply, which is considered relatively low. But a spike in interest rates could send that ratio higher “very quickly,” he said.
Still, he said builders have far better access to information about the economy and interest rates than they did in the 1970s, when overbuilding led to a glut of supply on the market.
Most analysts say sharp price declines are likely to be limited to individual markets that suffer severe economic setbacks.
“What would guarantee it would be widespread job losses in a regional economy,” said Nicolas Retsinas, director of Harvard’s Joint Center for Housing Studies. “Then the housing market is clearly at risk and very, very vulnerable.”
Other scenarios that could have a wider impact are more unlikely, industry analysts say. The biggest danger is a sharp increase in inflation, perhaps propelled by soaring oil prices, that would send long-term interest rates shooting higher. Another concern is a collapse in the dollar that could send rates higher and choke the economy.
Both those events are unlikely, said Duncan, of the mortgage bankers.
Industry officials are expecting — and even hoping for — a moderation in home price increases, especially in red-hot markets like Las Vegas, southern California and Washington, D.C.
Las Vegas, for example, has seen home prices appreciate 79 percent over the past five years, while prices have risen 86 percent in the Washington metro area, according to an index compiled by a federal agency.
“There is clearly a question of sustainability of price increases in the housing sector,” Retsinas said. “Some areas are already showing that.”
For brokers like Allyson Bernard, who owns a small brokerage in Danbury, Conn., a little price moderation would actually be welcome.
“I think it’s going to make a better equation between buyers and sellers,” she said. “I think it will be a healthy thing for the market.”
For first-time home buyers especially, she said, trying to make a deal can be a frustrating experience. She recalled one well-qualified young couple who spent several months last summer aggressively shopping for houses under $300,000 and were outbid at least four times before they had an offer accepted.
“Every time she heard my voice when I called she just burst into tears before she even heard what I had to say — it was just so horrid,” Bernard said