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April 26, 2004: Healthier Economy Bodes Well For Housing, Analysts Say

April 26, 2004
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WASHINGTON - Housing analysts at the National Association of Home Builders (NAHB) Construction Forecast Conference last week said that even if the Federal Reserve Board begins raising interest rates, the housing industry is moving into a healthier economic environment where job growth and income gains will keep residential construction and sales at healthy levels.

David Seiders, NAHB's chief economist, expects that the federal funds rate, which is currently 1 percent, will begin to rise in August and increase gradually to about 3 percent by the end of 2005. That would boost the prime interest rate, he said, but in terms of the availability and cost of loans, the industry is heading into a very favorable financing environment.

According to Seiders, mortgage interest rates, which in the past several weeks have climbed to the 6 percent level, probably will rise to no more than 6.25 percent by the end of this year and 7 percent by the end of 2005.

According to NAHB's forecast, single-family housing starts are expected to remain at high levels, declining slightly from 1.5 million units last year to 1.488 million in 2004 and 1.422 in 2005. Bolstered by growing strength in the condominium market, this year's multifamily construction is forecast to remain at last year's 348,000-unit level, with a small drop to 320,000 units next year.

David Wyss, chief economist, Standard + Poor's, concurred with Seiders that growth in employment and income are heading for higher ground.

"As mortgage rates rise," Wyss said, "mortgages won't be as affordable, but they will still be low by historic standards." He added that the increase in rates shouldn't have much impact on first-time buyers but it could have somewhat of a dampening effect on the trade-up market from home owners who are discouraged by the added financing cost.

Jim Glassman, managing director and senior economist for JP Morgan Chase, expects that the creation of new jobs, productivity-driven increases in income growth, and price stability will help the industry continue to prosper despite a change in Fed policy. He added that he would be surprised to see the Fed increase interest rates this summer "because employment is a long place from where it needs to be."

Publication date: 04/26/2004

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