Economists See Little to Dampen Housing Surge in 2004 - 2/2/2004 - Mortgage Loan Refinance Debt Equity

Economists See Little to Dampen Housing Surge in 2004

And if their forecasts for housing activity turn out to be wrong, they said, this year could actually be better than 2003, when overall production was the highest in 25 years and single-family starts and new home sales both set records.

David Seiders, NAHB’s chief economist, said he is betting that the Fed holds off from tightening monetary policy until just after the November elections, leaving long-term mortgage interest rates “pretty much flat.”

Seiders forecast that mortgage rates would move from an average 5.9% in the current quarter to 6.4% during the last quarter of the year, but noted that they were “5.6% right now,” below expectations.

“Interest rates are now lower than had been expected, and the rates may move up less than projected in the months ahead,” he said. “Thus, the risks to NAHB’s housing forecast for 2004 are mainly on the upside, and there is a possibility 2004 could even surpass the excellent performance of 2003.”

David Berson, chief economist for Fannie Mae, said that inflation is the most important economic factor for housing, and that until the Fed sees it rise from its current 0.5%-1% range closer to a more comfortable 2%, it will have no reason to tighten monetary policy.

“It may be a while to see core inflation move up,” Berson said, “and it could decline a bit more in the first half, keeping the Fed on the sidelines for a longer period.”

With mortgage interest rates unlikely to move up very much, “this could be the fourth consecutive record year” for the housing industry, he said, but in all likelihood it won’t be, partly because buyers who might have bolstered the market this year moved up their buying plans last year when they saw mortgage rates start heading higher.

Berson forecast a record $1.2 trillion in mortgage originations for home purchases this year, up from $1.1 trillion in 2003, but refinancings will tumble from $3.7 trillion last year to $0.6 trillion in 2004.

Frank Nothaft, chief economist for Freddie Mac, said this year’s modest increase in mortgage originations to buy homes would be attributable to 5%-6% price appreciation.

Nothaft said he expected mortgage originations to decline by 40% overall, with a 60% decline in refinancings, which would account for about 35% of the mortgage market.

Adjustable rate mortgages should hold on to their current share of the market, which is 25%, he said.

Noting some problems in the multifamily sector with slowing vacancy and absorption rates, Nothaft said that “the rental market has stabilized on the whole” and there should “no further deterioration.”

Although he would like to see the federal deficits on a downward path, Nothaft said that they were responsible for stimulating the economy, are “not nearly a record” as a share of the Gross Domestic Product, and “the ability of the economy to finance the deficit will improve over time as the economy strengthens.”

Like his colleagues, Nothaft expects good economic growth, declining unemployment, rising family income and low interest rates for 2004, which “translates into a very brisk housing market.”