| Housing prices overall will grow by about 3% this year, compared to 10% in 2004, he said. Most places will see price gains in the 4%-4.5% range, Berson said, although prices will probably go down in some markets. Berson said he couldn’t predict which markets are headed for a real price decline, but most at risk are those that have had high price gains relative to income along with other risk factors such as a high level of adjustable rate financing, relatively weak job growth and low household formations. Berson said that the investor share of home purchases has doubled over the past year — from 4.5% to the 9%-10% range — and is as high as 25%-30% in some markets. “Investors go in and out of markets all the time,” he said. “They have gone in because of the high returns they can get. If prices begin to slow this year, investors will start to slow their purchases, reducing demand for housing and increasing the supply of homes on the market, slowing price gains some more.” Refinancing Activity Continues to Slide Rising mortgage interest rates will slow the refinance share of single-family mortgage originations substantially this year, according to Freddie Mac Chief Economist Frank Nothaft. In dollar volume, originations declined 30% last year and they should be down another 10% this year, he said, falling to $2.42 trillion from $2.75 trillion in 2004, entirely because of less refinancing activity. Although only about one in eight home mortgages are 7% or higher, refinancing will still account for about one-third of all originations by the fourth quarter of this year, fueled by families who took out Adjustable Rate Mortgages (ARMs) and are coming up to their first adjustment date and households who are using cash-out refinancing to tap into their home equity. The ARMs share of mortgages to buy homes will decline from the upper 30% range currently to about 28% by this year’s fourth quarter as the spread between initial ARMs interest rates and long-term mortgage rates continues to narrow, he said. Home price appreciation is headed into the 5%-7% range for 2005, Nothaft forecasted, the slowest pace in about six years. “It is unrealistic to expect recent high levels of home value appreciation to be maintained going forward,” he said. A Good Year for Consumers The prognosis for the overall economy looks more favorable for consumers this year than last, said James Glassman, senior economist for JP Morgan Chase, and increases in income and job growth could counterbalance slowly rising interest rates. He predicted that housing activity will ease a little bit this year, but could hold at current levels “and the big surprise would be if housing did even better.” “Interest rates are up,” he said, “but the Fed is taking its foot off the gas, not stepping on the brakes, so it shouldn’t be damaging to housing.” Glassman forecasted that the economic drag of rising oil prices last year would be reversed in 2005, and he noted that about one-third of the run-up has already been reversed, helped along by a relatively mild winter in the U.S. Mortgage debt growth will start to slow down significantly, he said. For some time, households have been able to take on more debt without increasing their monthly payments because inflation and interest rates have been falling. Now that interest rates are moving up, debt will have to grow more in line with increases in income, which is reminiscent of the 1980s, Glassman noted. | 
