FRONT LINES: ECONOMY

BY DAVID LEREAH

Ups and downs of growth

Home sales are likely to ease next year, but that doesn’t mean we’re saying good-bye to the housing boom of the past several years. I’m forecasting home sales to reach 6.25 million units, down a mere 3.7 percent from the expected 6.49 million units this year and the second-best performance on record. New-home sales will see a similar modest easing, from an anticipated 1.15 million sales in 2004 to 1.05 million next year.

What’s more, home price appreciation will stay healthy, easing from 7 percent to a historically stable 5.3 percent.

A real estate boom doesn’t mean sales post a record every year. There’ll always be fluctuations. We’ve already seen that in the current expansion. The market began to grow in 1992, cooled in 1995 and 2000, but each time came roaring back with four strong years in a row.

There’ll be more of those ups and downs, but thanks to our strong market fundamentals, the long-term trends have only one way to go—up.

• Mortgage rates will remain near historic lows.
• Home supplies will remain lean.
• Demographic trends will keep home demand buoyant.
  
  What’s more, even as the stock market improves and households show interest in equities again, there’s no doubt which sales professional—you or a stock broker—has the more compelling investment case to make. A home is a safe and highly leveraged asset, and its ability to generate wealth is second to none. You can see that by looking at how a modest housing investment can eclipse an investment in the Standard & Poor’s 500 Index.
  
  If in 1988 you bought a $250,000 house, assuming 20 percent down ($50,000) and 4.4 percent annual appreciation for the 16 years between 1988 and 2003, that appreciation would translate into a 22.1 percent annual return. That gain stems from the way mortgage financing can leverage your investment dollar.
  
  Your annual return on an investment of the same size in the S&P 500 Index over the same period would be 13.9 percent. That’s a difference of almost 60 percent.
  
  Yes, housing sales should cool. But thanks to strong market fundamentals and the compelling case for homeownership, that cooling will amount to no more than a breather as sales march upward.
  
  Lereah is senior vice president and chief economist for the NATIONAL ASSOCIATION OF REALTORS®.

FACTOID

Oil topped $50 a barrel in mid-October, a huge leap from the $25-$30 level at which it’s been hovering for the past few years. Instability in oil-producing countries, including Iraq, is behind the rise. Where oil prices go from here will help determine how much the economy grows next year.

Business Confidence

Easing seen Conditions for home sales continue to ease, with practitioners’ views on current business and business over the next six months in rough alignment. Confidence in buyer traffic continues to drop and has reached a level below where it was at this time a year ago; seller traffic is aligned with last year’s level.

	September	October
Current conditions	70.6	65.0
Expectations for the next six months	67.9	64.5
Buyer traffic	60.2	57.1
Seller traffic	54.4	53.2

Existing-home Sales

Heading up Sales of existing single-family homes were back up again in September after two consecutive monthly declines. Sales rose 3.1 percent to a 6.75 million unit pace, from a 6.55 million rate* in August.

Seasonally adjusted annual rate (in millions)*