Economists say housing market cooling, not crashing

More interest-rate hikes could temper optimism
By: Matt Carter: Inman News
Housing sales and starts are down from last year's peaks, and will continue to decline in 2007 and perhaps into 2008, economists at Fannie Mae, Freddie Mac and the National Association of Home Builders predicted today.

Although the housing market is slowing down with the economy, there are no signs of recession or a bursting bubble. A slowdown in the economy could cushion the decline in the housing market by bringing an end to a series of 17 quarter-point, short-term interest-rate hikes by the Federal Reserve, the economists said.

While housing prices aren't expected to appreciate as rapidly as they did at the height of the 2002-2005 boom, overall, they're not expected to decline, either.

"Though the direction of housing activity is unambiguously heading cooler, we remain confident that the climate is still temperate and that 2006 will finish as the third strongest year ever for the national housing market," Freddie Mac's office of the chief economist concludes in its July 2006 Economic Outlook.

David Seiders, chief economist at the National Association of Home Builders (NAHB), echoed that sentiment in a conference call today.

"We're going from unsustainable heat in 2005 ... to a more sustainable pace of economic growth," Seiders said.

Freddie Mac's chief economist, Frank Nothaft, said that while some homeowners with adjustable-rate mortgages could be vulnerable to rising interest rates, mortgage debt is largely protected by the value of housing stock, and homeowners continue to build equity.

Economists at Freddie Mac predict rising mortgage interest rates and waning demand for housing will slow the appreciation of home values to an annual rate of 7 percent in 2006, and 6.2 percent in 2007. That's a sharp drop from the second quarter of 2005, when the rate of appreciation during the 2002-2005 boom peaked at 15.4 percent.

At the time, interest rates on 30-year fixed-rate mortgages were still averaging a relatively low 5.7 percent. The top economists at Freddie Mac, Freddie Mae and the NAHB all expect interest rates on the same loan will average 6.8 percent for the rest of the year.

Those rates are driven by the Federal funds short-term interest rate, which stands at 5.25 percent.

"My hope and expectation is (the Federal Reserve has) gone far enough, and will stop at 5.25, and perhaps even feel the need to ease back a bit to 5 percent by the end of the year," Seiders predicted.

Fannie Mae's chief economist, Dave Berson, was less optimistic, forecasting that the short-term rate could go to 5.5 percent before the Fed pauses. Berson said his relatively optimistic projections for the housing market could be proven wrong if interest rates go higher.

The high cost of housing is also a factor in cooling demand, with the National Association of Realtors' Affordability Index reaching its lowest level in more than 15 years. Freddie Mac forecasts 6.96 million homes will change hands this year - a 7 percent decline from 2005, but still the third-strongest year on record. Total home sales could fall to 6.49 million units in 2007, roughly the same as 2003 levels.

The National Association of Home Builders also reports that home builder optimism is at its lowest level since April 1995. Freddie Mac predicts a slowdown in new construction, with housing starts down 7 percent to 1.92 million units in 2006 and another 9 percent decline next year.