Friday, January 14, 2005

Slow housing market could hamper economy, builders' economist says


ORLANDO, Fla. – Facing rising interest rates and slowing demand, the nation's housing market could become a drag on the overall economy in the coming year, the chief economist of the National Association of Home Builders said yesterday.

Economist David Seiders said at the trade group's annual convention that housing has been a powerful growth engine for the past four years but is likely to go into neutral at best.

Business growth is likely to take up the slack, he said, and keep the U.S. economy growing at an annual rate of 3.7 percent, down from 2004's 4.4 percent level, after inflation is factored in.

"Positive trends in employment and household income will buoy housing demand in 2005," he said, "while a rising interest rate structure and overinflated house prices – in some areas – will strain affordability and work against these positive factors as the year progresses."

With higher interest rates expected, Fannie Mae economist David Berson said home prices are likely to increase less rapidly in the coming year, slowing to an average 3.5 percent gain nationally, compared with 10.5 percent last year.

"There is little prospect we'll see a national decline in prices," Berson said, barring a national "calamity."

Some areas may experience an actual price decline, he said, but probably not places such as San Diego that have a strong economy and population growth. San Diego County is one of the most costly housing markets in the nation, with an overall median price in November of $487,000, according to DataQuick Information Systems.

Seiders projected that housing starts will drop 3 percent to 4 percent this year as interest rates rise about one percentage point from their current levels of around 5.75 percent for 30-year, fixed-rate loans.

Slightly lower interest levels were projected by Berson, chief economist of Fannie Mae, and Frank Nothaft, chief economist of Freddie Mac, who both joined Seiders in previewing the coming year's housing outlook.

Fannie Mae and Freddie Mac are government-chartered companies that buy mortgages from lenders and sell them to investors on the secondary market to assure a ready supply of home-loan funding. But the disclosure in recent months that both companies had engaged in questionable accounting practices has brought additional scrutiny of their practices and talk of increased congressional oversight. The disclosures led to the resignations of top executives at both companies.

Alluding to these problems, the incoming president of the home builders group, David F. Wilson of Idaho, said in a written statement that he will help "ensure that efforts to re-regulate the housing government-sponsored enterprises do not impede the housing finance system that has helped generate the strongest U.S. homeownership on record."

Industry observers have worried that any instability in the secondary mortgage market could trigger even higher interest rates and less availability of mortgage funds.

Berson said rising interest rates will further cool the refinancing market and take loan originations down to $2.1 trillion or $2.2 trillion from last year's $2.8 trillion.

Freddie Mac's Nothaft noted the growing popularity of adjustable-rate mortgages, particularly those carrying no interest for the first five years in high-priced markets.

"That's not a big risk if homes are appreciating," he said. But if an area sinks into recession and homes do not gain value, interest-only-loan holders could be put at risk of default.

The economists were speaking against the backdrop of a festive mood at Orlando's giant Orange County Convention Center, where 1,500 exhibitors filled the equivalent of 40 football fields with construction-industry materials from pickup trucks to faucets. Vendors were pitching their products to more than 90,000 delegates from the United States and abroad.

Appliance manufacturers were touting $2,000 refrigerators; window and door makers were showing off "insulated hurricane impact products;" and materials dealers were unveiling alternatives to wood, tile and other traditional lines.

Builders have grumbled that construction costs have skyrocketed in recent months because of increased overseas demand for concrete and wood. But the rising cost of land has far outpaced the price increases for materials, many analysts noted.

Michael Carliner, an economist at the National Association of Home Builders, said the need to rebuild after last month's tsunami in South Asia will not boost demand for construction materials that would be used in the United States. But a diversion of shipping capacity to aid victims of the disaster may have some effect on prices and supplies.

Ed Sullivan, chief economist for the Portland Cement Association, said even with the greater demand for cement, an ingredient in concrete, the price increase has amounted to only $283 to the typical $6,500 bill for concrete used in a single-family home.

Carliner said prices should moderate in 2005, particularly for lumber as a result of expected trade agreements with Canada, the source of one-third of U.S. construction wood.