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Although no one can forecast what Alan Greenspan and the Federal Reserve Board will do when it comes to interest rates, there is talk that rates might be on the rise. What impact what they do will have on the housing market may depend more on how well the economy does and whether there is job growth than anything else.
In spite of higher interest rates, economic growth is expected to remain above historic averages over the next two years, stimulating job growth and sustaining home sales, according to the National Association of Realtors.
David Lereah, the association's chief economist, said home sales will be strongest during the first half of the year. "With mortgage interest rates bottoming out in March, we've had a big rush of homebuyers this year," he said. "Home sales should hold close to record territory for a couple months, then ease in the second half of the year but remain at historically strong levels."
The 30-year fixed-rate mortgage is expected to rise gradually to 6.6 percent by the fourth quarter. "Higher interest rates will hurt lower-income buyers who are at the margins of qualifying for a loan, but a rising stock market should help upper-income buyers. A challenge remains to preserve housing opportunities for low-to-moderate-income households," he said.
Existing-home sales are projected to reach 6.00 million in 2004, just 1.6 percent shy of the record 6.10 million last year. New-home sales should come in at 1.07 million, only 1.2 percent below last year's record. Housing starts are forecast at 1.84 million in 2004, slightly below the 1.85 million posted last year.
The median existing-home price is projected to increase 4.7 percent this year to $178,100, while the median new-home price should rise 5.1 percent to $205,000. In the San Francisco Bay Area, median home prices are more than three times higher than the national figures. A recent study also showed the San Francisco Bay Area with one of the largest gaps in the state of California for qualifying income at $68,920, where potential homebuyers had a median household income of $69,810 but needed qualifying income of $138,730 to purchase a median-priced home at $601,820.
Lereah said the U.S. gross domestic product is forecast to grow 4.7 percent this year and 4.3 percent in 2005, both above the historic average of about 3.2 percent. "These strong growth figures are supported by some pent-up business spending this year, and a reduction in the trade deficit is expected next year," he said. "That is stimulating job growth, so the unemployment rate should to drop to 5.4 percent by the end of the year."
The consumer price index is forecast to rise 2.0 percent this year, with a rise in core inflation and additional pressure from job growth. Inflation-adjusted disposable personal income should grow by 3.6 percent in 2004, while the consumer confidence index is expected to rise to 99 in the fourth quarter.
In the San Francisco Bay Area, the median home price is $508,960, while median household income is $65,940. With a monthly payment of $2,420 and qualifying income at $120,020, there is an income gap of $54,080 of qualifying income needed.
Information provided in this column is presented by the Realtor members of the Silicon Valley Association of Realtors at www.silvar.org. Send questions on any topic to jnewton@jnpr.com.
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