With new-home sales moving to historic highs last year, many ask how long the U.S. housing market will continue its present run. The answer: for quite some time unless mortgage rates or economic conditions change significantly.

Our demand model shows that home-buying activity should increase about 1 percent per year over the remainder of the decade.

Our model simply assumes that:

  • everyone gets 1 year older each year,

  • immigration trends stay constant,

  • home prices rise at the same rate as incomes,

  • the home-buying rate and home ownership rate by age remain the same,

  • the new-home share of total sales volume remains the same, and

  • mortgage rates remain stable.

    We are highly confident in all of the assumptions except mortgage rates, which are perfectly priced every day based on investor’s expectations of the future.

    While the number of young buyers is expected to decline slightly, rising home ownership among older individuals should offset the decline in home-buying activity by an increasingly smaller pool of younger buyers. As we showed in our forecast for 2004, which we have recently revised upward, the age of the head of household and the composition of the household, play a large part in determining when people buy a home, what they buy and how much they can pay.

    Economic Growth: C-

    The first revision to fourth quarter economic growth indicates the U.S. economy moved ahead at a rate of 4.1 percent. Though significantly slower than the previous quarter, the revised rate was still above earlier estimates for fourth quarter and supports the notion that the U.S. economy continues to improve. Though payroll employment posted a disappointing gain in February, the good news is that losses in factory employment continue to contract and there hasn’t been an overall decline in employment since last August. 

    Leading Indicators: B

    The ECRI Weekly Leading Index’s six-month growth rate continues to be high, indicating that the economic rebound should persist in the coming months.

    Mortgage Rates: A+

    Fixed mortgage rates remained under 6 percent in February. With Greenspan & Co. saying it’s the data and not the calendar that matters, February’s weak employment report enables the Fed to hold the line on interest rates. The most recent Freddie Mac release shows mortgage rates drifted down to 5.64 percent.

    High employee productivity has contributed to low inflation, which should be the norm through 2008 according to demographers. Managers continue to feel pressure to rely on efficiency gains and hold payrolls down. The recent increase in capital investment aimed at improving plants, rather than expanding them, supports the tight-fisted view of managerial behavior. With yet another lynch-pin added to the argument that productivity gains continue, one can assume that job growth in this recovery will be less than the long-term norm, but at the same time keep inflation – and interest rates – tame for the foreseeable future.

    Consumer Behavior: C

    Disappointing news on the job front negatively impacted consumer confidence, which slipped to its lowest level since November. A significant drop in consumer expectations for business and employment conditions caused much of the decline.

    Existing-Home Market: B

    Existing-home sales slipped to 6.04 million annualized sales in January, as inventory ticked up to 4.4 months. This is still a strong showing and is only slightly below last year’s record level of 6.1 million sales.

    New-Home Market: B+

    Annualized new-home sales slowed in January to 1.1 million, which is still high when compared to a fantastic finish in 2003 of 1.13 million sales. The median new-home price slipped to $196,000, possibly indicating strong sales activity in the more affordable price points. 

    Housing Supply: C+

    Both housing permits and starts slowed in January, mostly due to severe winter weather conditions in some parts of the country.

    John Burns is the founder of Real Estate Consulting in Irvine, Calif., which monitors changes in real estate market conditions and provides consulting services, including strategic planning, market research and financial analysis. Rebecca Wood, Ph.D., V.P., co-authored this article.


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