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Historically Strong Housing Market Expected in 2005

January 13, 2005

WASHINGTON – After four consecutive record years, home sales should ease but remain close to record levels in 2005, according to the National Association of Realtors®.

Following an estimated 8.9 percent jump to 6.64* million existing-home sales in 2004, activity will remain strong. Sales should decline about 2.5 percent to a total of 6.48 million in 2005, which would be the second highest on record. New-home sales should come in at a record 1.19 million for 2004, up 9.5 percent from 2003, with 1.11 million sales expected in 2005 – which would also be the second strongest on record.

David Lereah, NAR's chief economist, said the housing sector is operating at a higher plateau. "No one expects home sales to set a record every year, with some ebb and flow normal as market conditions and needs shift," he said. "Even so, home sales will stay well above what was considered to be a healthy level in the late 1990s. The population has grown, household formation is strong and demographics tell us this trend will continue. In addition, a similar mix of economic conditions expected in the U.S. for the foreseeable future."

Housing starts for 2004 are projected at 1.94 million units, the best showing since 1978; new construction is forecast at 1.87 million units this year.

The rise in the national median existing-home price should be 7.7 percent for 2004, with the annual price at $183,100; an increase of 5.3 percent is expected in 2005 to a median of $192,800. The typical new-home price rose about 10.4 percent in 2004 to $215,300; this year, the median should grow by 5.5 percent to $227,200.

"A modest slowdown in home price appreciation will be healthy for the market, offering sellers a good return on their investment while keeping prices within reach for home buyers," Lereah said.

Lereah expects the 30-year fixed-rate mortgage to trend upward to 6.5 percent by the end of 2005, "still very low by historical comparisons," he said. "Outside of the last two years, when the fixed-rate mortgage averaged 5.8 percent, we have to go back to the mid 1960s to see comparable mortgage interest rates."

Inflation should remain modest with the Consumer Price Index rising 2.6 percent this year, following an increase of 2.7 percent in 2004. The U.S. gross domestic product is forecast to grow by 4.0 percent in 2005, after seeing a growth rate of 4.4 percent last year. The unemployment rate should decline to 5.1 percent by the end of 2005.

"Even with similar numbers, the reasons for economic growth have changed," Lereah said. "Over the last few years, the economy was driven by consumers, housing and defense spending. Over the next couple years, the economy will grow nicely on the weight of business spending, along with some improvement in net exports."

Inflation-adjusted disposable personal income is projected to grow 3.8 percent this year, following a 3.0 percent increase in 2004. The consumer confidence index should rise to 106 by the second half of 2005.

Source: The National Association of Realtors

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