It takes a mother to tell her twin sons apart and it takes an economist to tell the difference between this year’s housing market and the last. Most are predicting more of the same hot pace of home sales with a little cooling from record highs due to rising interest rates.

But a few differences will mark 2005.

“We expect home price gains to slow meaningfully this year,” Fannie Mae Chief Economist David Berson said today during a housing and mortgage outlook conference call hosted by the Homeownership Alliance.

2004’s home price appreciation rate of 10.5 percent as tracked by the Office of Federal Housing Enterprise Oversight is “clearly unsustainable,” he added. This year, Berson anticipates price gains to sustain a 3 percent to 4 percent pace.

Median home-price data for 2004 hasn’t been released yet, but the National Association of Realtors is expecting an annual price of $183,100 for existing homes. NAR expects sales of existing homes to top 6.64 million for 2004.

Some of the differences in the housing outlook this year that Berson pointed out include an expected decline in investor share of home purchases and a slowing of the “buying ahead” behavior seen in past years. Many buyers that potentially were slated to buy in 2005 instead bought early in 2003 or 2004 to take advantage of low interest rates.

“We think in 2005 some investors will view returns in other markets as better (than housing),” he said. “That will put some downward pressure on housing demand.”

How much investor demand cools will depend on the attractiveness of alternatives like stocks, bonds and foreign investments, he added.

David Seiders, chief economist for the National Association of Home Builders, added that some home builders the association surveyed said they’ve been trying to curb sales to investors whenever possible. “A lot of builders are attempting to not sell to people who plan to not be occupants,” he said. Some have added clauses in sales contracts stipulating that the home cannot be sold within a year, or tried other means.

“Most builders don’t like the potential implications of it,” he said.

Seiders expects housing starts to dip about 3.5 percent from 2004, which ended the year at about 1.95 million, according to today’s Census Bureau data. He said the general attitude of home builders was upbeat at last week’s International Builders’ Show in Orlando, but he also cautioned the building industry about rising inventory levels this year.

Seiders is calling for another good year for overall economic growth with ongoing improvement in the job market and household income growing as the year progresses. He expects the Federal Reserve to continue raising the overnight funds rate, ending the year at about 3.75 percent. The funds rate currently is 2.25 percent.

Despite another year of anticipated interest rate gains, Paul Merski, chief economist for the Independent Community Bankers of America, also is predicting a strong economy, fueled by a growing employment market and positive real wage growth.

“Banks are well aware and well positioned for what they see as modestly rising interest rates into 2005,” Merksi said.

He expects the mixture of solid employment and income gains to make homes affordable, and also predicts price gain rates to fall to between 3 and 5 percent this year. “Those factors alone will keep the demand solid in 2005, but certainly not any record-setting pace,” he said.

Aside from slightly higher interest rates on long-term mortgages and a continued decline in refinancings, changes in home loan products will distinguish this year’s market from last. Frank Nothaft, Freddie Mac’s chief economist, expects a significantly higher percentage of homeowners to cash out equity when they refinance this year.

“If you look to 2003 at the height of the refi boom, most people were not engaging in cash-out refi, but instead were locking in a low rate or shorter term,” he said. Only about one quarter of refinancings had a cash-out component then. But Nothaft is predicting about 75 to 80 percent of refi loans in 2005 to take cash out of equity.

Nothaft also noted changes within the adjustable-rate mortgage segment, saying the overall ARM share of originations gradually will decline over the course of the year, comprising about one-third of the purchase market in the second half of 2005.

“The dominant product has been the hybrid ARMs,” he said, with the five-year ARM becoming the most popular. This loan has an extended five-year period of a fixed rate before the rate becomes a one-year adjustable.

The interest rate on the five-year hybrid ARM currently is about 5 percent. Freddie Mac recently added the five-year ARM to its weekly index of interest rates.

Home equity lines of credit, or HELOCs, and home equity loans were popular in 2004, accounting for about 20 percent of overall mortgage debt growth, according to Nothaft. While he expects homeowners will continue to tap into their equity using these loan products, he doesn’t think the overall mortgage debt share will grow as much this year.


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