Housing.

• Author: Fisher, Jeffrey D.

Existing home sales have continued to be strong and should finish 2002 at a record level. The National Association of Realtors projects existing home sales of 5.44 million units in 2002 and the National Association of Home Builders projects 5.53 million units for 2002. This compares with 5.29 million units during 2001. Existing home sales should remain strong during 2003 although they may be slightly off the record pace of 2002.

Housing starts for 2002 will be at about 1.69 million units, which is the highest level since 1986, when housing starts peaked at 1.81 million units. Prior to that the highest level was a record 2.02 million units in 1978. The National Association of Home Builders projects housing starts to total 1.63 million units in 2003, just slightly off the 2002 level.

Table 1 summarizes the housing and interest rate forecast from the National Association of Home Builders, which is consistent with the forecast from the IU econometric model. Mortgage rates are likely to start 2003 at a slightly lower level than the average for 2002, as rates recently dropped to record lows during the end of 2002 following the lowering of interest rates by the Fed. For the year 2003 mortgage rates are not likely to differ significantly from those during 2002 (see Figure 1).

[FIGURE 1 OMITTED]

The low mortgage interest rates in 2002 resulted in a record level of home mortgage refinancings, with more than half of the borrowers taking cash when they refinanced. This has helped fuel consumer spending. It isn't likely that this level of refinancings will continue during 2003, since most homeowners have already refinanced.

It is interesting that the market value of the residential housing market is now greater than the stock market. Of course, a large part of this is the declining stock market. The market capitalization of stocks listed on the New York Stock Exchange and the Nasdaq Composite dropped during 2002 to about $11.4 trillion, down from a peak of $17 trillion in March 2000. Over the same time period rising home values and increasing housing stock from new home construction boosted the value of the residential housing market to about $13.1 trillion. Of that amount, homeowner's equity (after subtracting mortgage debt) was about $7.5 trillion.

As suggested from the discussion above, home prices have...