Don't believe real estate bubble theory

March 25, 2004

Housing still good to grow, builder group's economists predict

By Glenn Roberts Jr.
Inman News

National Association of Home Builders administrators and economic forecasters don't expect the booming housing market to hit a wall. In fact, indicators suggest the housing sector should do well for the next several years, said Jim Glassman, a senior economist for JP Morgan Chase.

Glassman, who joined NAHB leaders Wednesday in a discussion of economic trends for the industry, said it is time to burst the bubble theory. Inflation has dropped to 40-year lows while household income is roughly keeping pace with escalating home prices and debt service is very manageable these days.

"There is nothing going on to suggest that home prices are straining," he said. "I don't think there is anything spiky going on."

Any increases in interest rates will likely be due to the improving health of the overall economy, such as an increase in employment and income levels, he said, and shouldn't dramatically impact the housing market.

"A very large proportion of mortgages outstanding are locked in at fixed rates. People are pretty well protected (from interest rate increases)," he said.

"I would be shocked if we didn't get job growth," he added.

Dave Seiders, chief economist at NAHB, said it is surprising that interest rates have stayed as low as they have for so long, and it's likely there will be some increases this year. Rates could rise up to about 6.1 percent by the end of the year, he indicated.

"We had a real surge of home sales and housing production in the latter part of 2003. The real question is: ‘Can we at all match the performance of 2003 as we move through 2004,'" Seiders said.

Median home prices went up about 9.5 percent in the past year, with home prices estimated to rise 4 percent from fourth quarter 2003 to fourth quarter 2004. The index for housing starts and home sales is forecast to decline 2 percent this year, Seiders said.

David Crowe, SVP of federal regulatory and housing policy for NAHB, said the organization is pursuing initiatives, such as the creation of a federal no-down-payment loan, to increase the amount of housing available for working families, including local government employees who cannot afford to live where they work. Rising home values have created an even higher barrier to housing for these workers, Crowe said.

Federal regulation of Fannie Mae and Freddie Mac is another pressing issue for the housing industry, said NAHB officials. Some "anti-GSE forces" in Washington are pushing for stiffer regulatory controls of Fannie Mae and Freddie Mac, Seiders said.

NAHB CEO Jerry Howard said there is talk of new legislation related to the future function and solvency of these corporations that could damage the overall housing industry.

He repeated one comment about the situation that he said seems to ring true: "Before you pull the plug, you better make sure that you're bigger than the drain." He said it could be dangerous to tinker with the housing industry, which "remains the only strong part of the economy at this time."

Copyright: Inman News Features

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