FRONT LINES: Economy

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Housing: still about demand

BY FRANK NOTHAFT

On any number of accounts, the U.S. economy remains sluggish. Unemployment is up, consumer confidence is down, and the rate of economic growth remains tepid. In the first quarter of this year, growth was about 2 percent. But housing remains well-positioned, thanks in part to low interest rates and continuing sound asset appreciation.

There are even more fundamental reasons for the strength of the housing sector. First, ours is a growing country with a great demand for housing. We at Freddie Mac estimate the number of U.S. households to expand by 1.3 percent each year for the next 10 years, generating 100 million home loan transactions, including 15 million for first-time homebuyers, many of them immigrants. At the same time, we expect the national homeownership rate to climb from 68 percent today to 70 percent in 2010, with more than 2 million households swapping renting for owning.

What does this level of demand mean? It translates into strong home price appreciation, which averaged 6.6 percent in the first quarter of 2003. That’s a highly sustainable rate of appreciation, not much above the average of about 5 percent over the past 50 years.

To be sure, some markets, including parts of California and the Northeast, have seen price increases much higher than that, at about 10 percent. But appreciation in those markets directly reflects the level of supply and demand: Those areas have a shortage of housing and buildable land.

Second, our housing finance system—including the securities offered by Fannie Mae, the Federal Home Loan Banks, and Freddie Mac—continues to attract capital from around the world, helping to keep mortgage interest rates low and housing more affordable than it otherwise would be. Sound underwriting is behind the investment attraction of these securities.

In addition, home loan performance remains higher than for other types of consumer lending, and well above mortgage performance throughout the 1980s and 1990s.

All this adds up to a strong housing market. But it also helps explain why housing prices are far from the speculative bubble that collapsed the stock market. As the fundamentals show, there’s no speculation in the housing market—just households who need a home and would like to own one of their own.

Guest columnist Nothaft is chief economist at Freddie Mac, one of the secondary mortgage market makers.

FACTOID:

In March, home prices continued to increase at a modest pace nationally; housing inventories saw some easing.

March national median* home price
2003 $163,100
2002 $153,200
Increase 6.5%

March national existing-home inventory
2003 2.31 million units (supply level, 5 months)
2002 2.16 million units (supply level, 4.8 months)
Increase 6.9%

* The median is a typical market price where half of the homes sold for more and half sold for less.
Source: NAR Research

BUSINESS CONFIDENCE

Bright outlook In April practitioners’ confidence in the residential market swung into spring, with current and future business expectations heading upward. Survey respondents foresee strong sales through the summer.

	March	April
Current conditions	70.3	72.1
Expectations for the next six months	71.3	74.8
Buyer traffic	67.8	70.0
Seller traffic	54.9	55.1

Source: NAR Research

Existing-home sales

Record pace eases Existing single-family home sales eased in March to 5.53 million units, down 5.6 percent from 5.86 million units* in February. The easing was expected, and sales remain strong by historical standards. “When we exceeded the 6 million unit pace in January, it was clear that monthly sales rates would come off of that peak,” says David Lereah, NAR chief economist.

Seasonally adjusted annual rate†

Source: NAR Research