Will the Housing Market Collapse in 2004?
By Dian Hymer
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2003 shaped up to be one of the best years for real estate on record. Sales of existing homes were 5.8 percent higher in 2003 than they were in 2002, according to the National Association of Realtors. New-home sales set a record in 2003, rising 8.2 percent above the 2002 sales level. David Lereah, chief economist for NAR, predicts that 2004 will be the third best year ever for housing.
Interest rates have fueled a strong housing market at a time when the economy has been struggling with recovery. Many wonder what will happen when interest rates rise. Will home prices—which have enjoyed years of generous appreciation—drop?
Interest rates have increased in recent months from the lows set in late spring and early summer. Even so, NAR predicts that the 30-year fixed-rate mortgage will average 6.7 percent in 2004. This is still low by historical standards.
No one knows for sure when interest rates will rise to a level that will affect affordability and the strength of the housing market. However, it's expected that inflation will remain low for some time. NAR predicts that consumer price inflation will actually drop to 1.6 percent this year from a projected 2.4 percent last year. As long as inflation remains low, it's expected that the Federal Reserve will keep short-term interest rates low to keep from jeopardizing the economic recovery.
Housing will continue to be strong, according to the Oct. 3, 2003, issue of The Kiplinger Newsletter. Kiplinger sees interest rates rising to 7 percent by December 2004. However, an increase in interest rates is not expected to put a dent in housing demand until rates reach 8 percent. Kiplinger doesn't see a housing price bubble that's about to pop, as some naysayers have predicted. According to Kiplinger, a few housing markets are ripe for correction, including Boston, Chicago, Houston and Charlotte, N.C. In these areas, home building and price gains are outpacing job and income growth. Nationally, homes sales are expected to drop 5 percent this year, but home prices will appreciate 4 percent. Kiplinger is generally bullish on housing, which "will remain an important foundation of personal wealth."
House hunting tip: Some economic forecasters don't expect interest rates to rise much from their present level until the second half of this year. If you're planning to buy or sell a home in 2004, you may find your greatest opportunities in the first half of the year.
Interest rates could bounce up and down this year as they have over the last several months. They're up one week and down the next. Rather than risk missing a good rate, it's advisable for most home buyers to lock in an interest rate. If you don't and rates rise, you'll be stuck paying a higher rate.
In areas where inventories increase, expect that it will take longer to sell your home. But, where inventories are low relative to demand, buyers will still have to contend with multiple offers. You may find that you have different market dynamics operating within one market area. For example, in the $1 million-plus price range, you could see more supply than demand. In the sub-$500,000 market, there could be multiple buyers for every well-priced listing. In general, however, buyers should find less competition in the marketplace this year.
The closing: "Well-priced for the market" will be the name of the game this year, as it was in 2003.http://www.houseandhome.msn.com/Financing/WilltheHousingMarketCollapsein2004.aspx |
