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Strong spring home sales will inflate prices

Home buyers beware: The 2004 spring home buying season is shaping up as a definite seller's market.

The amount of money Americans spend on home purchasing or refinancing this spring is expected to drop about $2 trillion from 2003, but economists project that the year 2004 will still be the second best in history. Strong demand and rising prices both tend to give sellers the upper hand in negotiations.

This spring and summer the pace of the last few years is expected to continue. Even as much of the economy has been in the doldrums, the housing market has been on a roll. Last year was the fourth in a row that average home prices rose more than 7.5 percent, and total mortgage production in 2003 eclipsed all previous years.

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For 2004, the pace of sales probably won't be quite as frantic as it was during 2003, but will remain strong, say industry experts. Appreciation in housing prices may more moderate, but should continue.

Several factors are behind the robust market:

  • Interest rates are expected to remain fairly low into the fall of this year.
  • A recovering economy should help boost both incomes and interest in home buying.
  • Shifting demographics, including the movement of members of Generation Y into what economists refer to as "the home-formation stage," also bodes well for the housing market.

By the numbers
In 2003, Americans bought, sold or refinanced a record $3.8 trillion worth of homes, says Doug Duncan, senior vice president and chief economist with the Mortgage Bankers Association (MBA), Washington, D.C. That number is expected to decline to about $2 trillion this year. That's a steep drop, but most of it will come from an expected decline in refinancing, as most people thinking of refinancing already have done so, he adds. The actual number of homes sold is expected to come in at about $2 trillion in sales -- a decline only about 5 percent from 2003. "So, historically, it's still a big year."

Similarly, Lawrence Yun, a Washington D.C.-based senior economist with the National Association of Realtors (NAR) predicts a drop in home sales of about 3 percent this year, after a 10 percent rise during 2003. "In 2004, we anticipate very strong home sales activity," says Yun. "Maybe not a record year, but it will be strong."

Last year, the number of newly built homes also hit a record level, says Michael Carliner, economist with the National Association of Home Builders in Washington, D.C. Nearly 1.1 million homes were built and sold. This year, that number might come down a bit, but should remain strong, he adds.

What's behind the optimism of most housing analysts and economists? For starters, most predict that interest rates will remain low, although they might inch up by the end of the year. "Every indication is that the Fed (Federal Reserve Board) will continue to pursue a low interest rate policy," says Rick Davis, president of the Homeownership Alliance in Washington, D.C.

"The economy will be a help," adds Davis. "It's chugging along at a 4 to 4.5 percent growth rate."

Demographics shift
Perhaps the most significant factor that will drive home sales over the next decade or so is the shifting makeup of the population. First and foremost, there's the continuing affect of 86 million baby boomers. "The current baby boomers are in the prime homeownership age group of 45 to 65," says Yun of the NAR. And, as more boomers head into retirement, their appetite for second homes also should keep the housing market robust, says Duncan.

Another factor is the emergence of the 88 million members of Generation Y, or individuals now between the ages of 5 and 25. "That group is just entering the new home buying market," says Davis of the Homeownership Alliance. "So, you'll get a new impetus to homeownership."

Finally, immigration also should keep demand for housing strong. Over the last decade, approximately 11 million new immigrants came into the U.S., says Duncan. He predicts that trend will continue.

On the other hand
Despite all the signs pointing to a strong housing market this year, some questions remain. One is whether accelerating home prices might stifle demand. The general consensus is no. While home prices are expected to rise this year, the increase should be lower than it has been recently. Yun, of the NAR, predicts housing prices will rise about 4.9 percent across the country.

Similarly, most market observers discount the idea that a housing price bubble exists and is ready to burst, wiping out recent housing price gains. "I don't think a housing bubble will show up, says Carliner of NAHB. It's unlikely the supply of houses will greatly exceed demand, he explains, which would prompt a dramatic drop in prices. In fact, the opposite is true. The housing supply is growing, but slowly, due to a lack of available land, zoning restrictions and labor and materials shortages.

Outlook by region
Of course, even if the overall U.S. housing market remains strong, it will vary by region. Basic economics -- the law of supply and demand -- determines how hot or cold a particular market is.

On both coasts, where land for development is limited but demand for housing is strong, the markets are hot and probably will remain so. "The West Coast has a natural border and population pressure," says Duncan. In California, for instance, home prices in Orange and San Diego counties have jumped about 20 percent in each of the previous two years, he says.

This isn't to suggest that all of the interior sections of the country are doing poorly. Las Vegas, Nev., has been a strong market, says Yun of NAR. "Many people are moving there. Las Vegas may encounter the 'big city' effect soon, where you reach a certain size and the value of the land will shoot up." McIlwain of the Urban Land Institute notes, "Chicago is very strong and Denver seems like it will continue to grow."

On the other hand, a few regions have seen home prices stagnate or even decline. In the last quarter of 2003, for instance, the average housing price rose less than 1 percent in both Utah and Alabama, reports the Office of Federal Housing Enterprise Oversight.

If you're considering purchasing a home in an area with flat or declining prices, thoroughly check out both the home and those around it. "Look for stable neighborhoods with a high percentage of owned homes," says Davis of the Homeownership Alliance. Both are signs of areas that are likely to retain value.

Karen M. Kroll is a freelance writer based in Minnesota.

-- Posted: March 15, 2004
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