Housing.

• Author: Fisher, Jeffrey D.
• Position: The Big Picture

Because interest rates have remained at unexpectedly low levels during 2004, it appears that housing starts for 2004 will be slightly higher than we forecasted last year. Rates are expected to rise slightly during 2005 as the economic recovery continues, but there should also be continued job recovery. The thirty-year fixed-rate mortgage should gradually rise to 6.4 percent in the fourth quarter. The average rate for all of 2004 is expected to be 6.1 percent, only modestly above 2003's 5.8 percent.

While rising interest rates tend to dampen the demand for housing, job growth increases the demand. On balance, we expect housing starts to fall slightly for 2005 to a level of 1.85 million units, down from the 1.93 million units expected for 2004. This is still quite strong by historical standards. The single-family component of housing starts is likely to set a record during 2004. Multi-family is not quite as strong because more families can afford to own rather than rent.

Existing home sales have been strong during 2004, after setting a record of 6.1 million in 2003, and should also remain strong during 2005. The National Association of Realtors (NAR) forecasts existing-home sales to rise 5.7 percent in 2004 to 6.45 million. New-home sales should also hit a record, increasing 10.8 percent to 1.20 million in 2004.

Expenditures for home additions and alterations are expected to be strong because homeowners' equity has increased with rising home prices. High oil prices could produce a further rise in prices for certain building materials.

Low interest rates and the strong housing market during the past year put upward pressure on home prices. The median existing-home price will continue to show above normal appreciation, rising 7.3 percent in 2004 to $182,400. The median new-home price should increase 8.3 percent this year to $211,100. The rising cost of building materials has...