Housing market depends on economic recovery

By Jean Newton

The recent real estate market activity is confusing--even to the experts. While the record pace of home sales has confounded many economists, there seems to be one area of agreement. According to the National Association of Realtors, the future of the housing market is tied directly to the pace of the general economic recovery.

Chief Economist David Lereah of the National Association of Realtors spoke recently about the housing outlook at the National Press Club. Indicating that the market was off to a running start this year, Lereah said, "January and February are the two highest months on record for existing-home sales activity. Coming off of record years for both new- and existing-home sales, despite a recession and the events of Sept. 11, the volume of home sales has baffled the experts," Lereah said.

"Though we've had favorable affordability conditions from low-interest rates for some time, what hasn't been fully appreciated is the underlying demand for housing from our growing population, the desire of immigrants and minorities to achieve the American Dream, the fact most people continue to have good jobs, the relatively steady increase in home values and the desire to diversify portfolio assets into more tangible forms of investment," he said.

Lereah forecasts that economic growth in the United States, as measured by the gross domestic product (GDP), may top a growth rate of 5.0 percent in the first quarter of 2002. Following a period of inventory depletion, manufacturers will be increasing their stocks, which will add 2.5 percent during the first and second quarters. He expects consumer spending to remain strong, while government expenditures, which rose 10.2 percent in the fourth quarter, will continue to rise at a similar pace this year.

"Energy prices are a concern, but core inflation will be contained due to the strong dollar, excess capacity at factories, strong productivity growth and weak job growth," Lereah said. He expects the federal funds rate to rise 100 basis points (one percentage point) over the next year, with an initial tightening by the Federal Reserve of 25 basis points in late June, but much smaller increases in mortgage rates.

Lereah said the pace of the nation's economic recovery and its impact on mortgage interest rates will be the single biggest variable for the future of the housing market. "We expect a modest recovery with a modest increase in interest rates--in other words, a steady recovery," he said. "The 30-year fixed mortgage interest rate will rise to 7.5 percent by year end."

The National Association of Realtors expects existing-home sales to be in the range of 5.25 to 5.35 million units this year, meaning sales may exceed last year's record of 5.30 million. New home sales, which also set a record last year, will decline to the range of 860,000 to 890,000 units from the record of 909,000 units in 2001. Overall, existing-home prices are expected to increase in the range of 4.5 to 5.5 percent in 2002.

There is a sense that housing has been shouldering the general economy. "Real estate gains have been offsetting stock market declines. For example, since 1999, existing-home prices have increased 16.7 percent while the Standard and Poor's 500 index declined 7.5 percent. The buildup of wealth in homeownership is significant, with the typical homeowner holding about $50,000 in home equity," he said.

Cash-out refinancings in 2001 totaled $100 billion, while capital gains on sales of existing homes provided an additional $200 billion to the U.S. economy, Lereah said.

"The accumulation of home wealth has given consumers the resources and confidence necessary for other big-ticket purchases and has been the leading contributor to overall economic health. All this has made real estate a viable investment alternative to the volatility of the stock market."

According to the National Association of Realtors, a gradual improvement in the economy is expected to produce another record year for existing-home sales.

While home sales will not be able to sustain the breakneck pace experienced during the first two months of the year, Lereah said factors such as job growth, consumer confidence and a rising number of households will play a large role in taking home sales to another record.

A gradual economic improvement should result in generally modest increases in interest rates. "As the economy improves this year, the Federal Reserve will adjust its policy from accommodation and allow short-term interest rates to increase about one percentage point. The rise in mortgage interest rates will be a more modest increase," Lereah said. "Since interest rates are so low right now in historic terms, this will not have much of a breaking effect on housing markets."

The association forecasts the national median existing-home price for 2002 to be $155,300, an increase of 5.1 percent over last year. The typical new home price is expected to be $184,700 this year, up 6.1 percent from 2001, in part due to higher lumber prices.

The association forecasts the unemployment rate to average 5.7 percent this year, while inflation-adjusted disposable personal income should grow about 3.4 percent in 2002.

The National Association of Realtors is America's largest trade association, representing about 800,000 members involved in all aspects of the residential and real estate industries.

Seniors should RSSVP

Applications from seniors are now being accepted for a new program sponsored by the Silicon Valley Association of Realtors called RSSVP (Realtor Safety and Service Volunteer Program). Designed to help senior citizens or those with disabilities with repairs and other tasks to help improve health and safety around the home, the community outreach program will be held during the week of May 19-25.

The cost-free program provides a hands-on effort by local Realtors and affiliates who will come out to the home and perform tasks such as changing furnace filters, replacing smoke detector batteries, painting house numbers on curbs, washing windows or cleaning gutters.

RSSVP application forms for seniors and those with disabilities are currently available by calling volunteer coordinator Bill Marr at 408.369.7975. The deadline for application is April 19.

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