FRONT LINES: Economy

BY DAVID LEREAH

Reason for optimism in ’04

Housing sales in 2004 could once again give us a busy year, with 5.8 million existing-home sales projected. That would be the second best performance after the record-setting 6.07 million expected for 2003. What’s behind the optimism?

For starters, the economy is poised for solid 4.8 percent growth, supported by job gains and continued low inflation that’ll moderate any rise in mortgage rates. Yes, rates will rise somewhat. But they’re unlikely to move much beyond a still low 6.4 percent. Throughout 2003, rates averaged 5.8 percent.

At the same time, real estate remains poised to reap favorable dividends from demographic trends. Immigration growth is buoyant, the baby-boom market is strong, and consumers continue to see homes as a sanctuary from terrorism.

Is there anything on the horizon that can derail home sales near term? No, but there are long-term challenges, such as a widening perception among analysts that housing is running out of steam. The reasons:

• Home sales and price growth have outpaced household income growth over the past several years, and that can’t be sustained.
• Stock values are improving, so investors are slowing the capital shift from equities to real estate that helped fuel home sales in the aftermath of the tech bust.
• Lenders may tighten credit standards in response to rising mortgage rates, requiring higher downpayments and potentially pricing out some buyers.
  
  Federal policies could pose problems, too:
• Expansionary fiscal and monetary positions. The economy could overheat thanks to the multi-billion-dollar tax cut package enacted by the federal government and the Federal Reserve’s continuing accommodative monetary stance, which is pumping money into the economy. An economy that grows too fast raises the specter of inflation, which could translate into higher mortgage rates.
• Widening federal budget deficit. Analysts predict the budget deficit will top $400 billion by the end of 2004. It could swell further if the federal government continues increasing expenditures while reducing tax revenue. Historically, high deficits have pushed up interest rates, choking economic expansions and hurting housing markets.
  
  These are tough challenges, but for now, when the positives are weighed against the negatives, the balance falls in favor of another strong year in home sales.
  
  Lereah is senior vice president and chief economist for the NATIONAL ASSOCIATION OF REALTORS®.

Business Confidence

Solid market seen Practitioners see dimming conditions as sales prospects ease. But the outlook is rosier for sales six months out. Buyer traffic is dipping, strengthening inventories.

	November	December
Current conditions	64.6	62.8
Expectations for the next six months	70.4	74.8
Buyer traffic	60.3	59.2
Seller traffic	47.2	48.4

Existing-home Sales

Record pace eases Existing single-family home sales slipped 4.6 percent from October to a 6.06-million-unit pace in November, but sales remain on track to set an annual record. “Although sales in November were off from recent peaks, the pace is a very respectable number,” says David Lereah, NAR chief economist. “We’ll continue to see strong sales going forward, with 2004 likely to be the second-best year on record.”

Seasonally adjusted annual rate (in millions)*

FACTOID

With 2003 having gone out with a bang, recession seems to be out of the equation for 2004. Or is it? There’s a small chance an unforeseen event could tip the economy back into a recession, say top commercial real estate researchers. Far more likely, they say, is strong growth, along with strong productivity gains.

Economic scenario	Probability
Extended jobless recovery	60%
Strong GDP growth with continued strong productivity growth results in low to moderate job growth
Traditional economic recovery	35%
Very strong GDP growth with moderate productivity growth results in strong job growth
Negative economic shock	5%
Unforeseen event tips recovery back to recession

To find current economic data, including metropolitan home prices, visit the Research section of REALTOR.org.