| Analysts also painted a bright long-term outlook for housing production, house prices, homeownership rates and mortgage finance. Demographic trends and per-capita income growth were identified as key drivers of the long-term forecasts, along with projections of homeownership gains by minority households and lower-income groups as well as trends in debt leverage by America’s home owners. The Federal Reserve is key to the short-term outlook … The panelists agreed that Federal Reserve management of monetary policy is critical to the course of the U.S. and global economies and to the health of the housing sector. The Fed has been a very friendly force since mid-2003, holding the federal funds rate at 1% in order to help stimulate the economy, revive the labor market and prevent deflationary conditions from developing in the U.S. economy. Recent data on job growth and core inflation suggest substantial progress on both fronts, altering the conditions underlying the Fed’s extraordinarily stimulative monetary policy position. “Patience” may still be the watchword for the Fed, but sustained improvements in job growth and persistence of higher core inflation most likely will provoke some monetary tightening before the November elections. NAHB’s forecast now assumes that the Fed will pull the trigger on Aug. 10, rather than on Nov. 10, and that the federal funds rate will be 1.50% by year-end. The Fed could be even more aggressive than that, possibly moving at the June meeting or moving rates up more quickly, but higher-than-expected oil and gas prices, along with the resurgence of international terrorism and turmoil in Iraq, are new-found negatives for the economy. The Fed must consider those negatives in setting monetary policy. Higher mortgage rates will not crush housing demand … Long-term interest rates have moved up substantially in recent weeks, driven by indications of stronger job growth and higher core inflation as well as by market expectations of rate hikes by the Fed as early as this summer. Furthermore, most panelists expect the entire interest rate structure to move up to some degree during the balance of 2004 and in 2005. Will higher interest rates seriously weaken the housing sector? Most panelists (including yours truly) expect the negative impacts of higher rates on housing demand to be largely offset by the ongoing cyclical recovery in employment and personal income. Furthermore, increased use of adjustable-rate mortgages should help blunt the impact of increases in long-term rates that run ahead of the anticipated “normalization” of monetary policy. Housing demand also should be supported by two structural factors: - First, strong underlying growth in labor productivity will be supporting strong growth in real personal income, increasing the “appetite” for housing.
- Second, persistently low inflation in prices of goods and services will put a lid on long-term rates. Indeed, one panelist noted that low inflation is “worth its weight in gold for housing.”
Nor will higher interest rates cause house values to fall … The recent and prospective run-up in interest rates has revived discussion (primarily in the media) of potential “bubbles” in house prices and the economic damage that could be inflicted by falling house values. One of our panelists expressed some concern about “bubble” conditions in a number of metro areas — primarily in the Northeast corridor, Florida and California — based largely on abnormally high ratios of house prices to market rents. Other panelists (including yours truly) pointed out that low interest rates had kept ratios of mortgage payments to rents at historically low levels and stressed that rising income would keep the relative cost of homeownership low even as interest rates rise moderately. The anti-bubble group also stressed that the economic and housing market conditions that provoked regional or local house price declines in the past simply are not part of today’s scene. Growth of employment and income is strengthening rather than weakening in most markets. Furthermore, unsold housing inventory is thin rather than excessive virtually everywhere — particularly in the Northeast corridor, Florida and California where land-use constraints are quite stringent. Long-term trends will be taking housing to new heights… Looking beyond the current cycle, a number of panelists unveiled long-term forecasts that bode quite well for the housing sector. During the next decade: - Demand factors will support average production of about two million new housing units per year.
- The national homeownership rate will continue to rise from today’s record level and will exceed 70% by 2013.
- House price appreciation will average about 5% per year on a national basis and exceed that pace in areas with severe land-use constraints.
- Mortgage originations will average nearly $3 trillion per year and residential mortgage debt will more than double by 2013.
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