Pick up this week’s New York Times or Wall Street Journal or flip on over to CNN and the cries of real estate bubble mania are loud and clear. The discussion comes in anticipation of next week’s Fed meeting, which is widely expected to bring about a hike in interest rates.

The bubble frenzy may have gripped the media and everyday conversation, but the housing industry doesn’t appear fazed by all the doomsday talk. They’re not listening to the fears, and instead are still predicting a banner year for housing sales.

Economists say they’ve already built into their forecasts an assumption that mortgage rates will rise given anticipated actions by the Federal Open Market Committee. Even with those increases, they say, the housing market will remain strong.

David Berson, Fannie Mae’s VP and chief economist, said he anticipates any increase in mortgage rates will be slight since they’ve already gone up in anticipation of the Fed raising its federal funds target rate. He believes mortgage rates will end the year well below 7 percent.

Those rates, combined with a better jobs market, will keep housing sales strong in 2004, he said. The refinancing boom is officially over, Berson said, but home sales are likely to top last year’s by a small margin. Housing sales in 2005, however, could decline as interest rates push past the 7 percent mark.

Home price gains this year are likely to continue, though they may line up more with increases in household income than they have recently, Berson said. And on a national basis, Berson doesn’t see signs of a housing bubble. Certain areas such as California that have seen incredible gains in value, could see home prices drop, he said.

The Mortgage Bankers Association has built into its forecast a “modestly rising rate scenario” with interest rates still below 7 percent by the end of the year. Because of that assumption of rising rates, the MBA, like other groups, is not adjusting its forecast based on the Fed’s actions next week.

Higher interest rates are expected to cause a slight moderation in overall home sales and residential building, but MBA expects a record number of new-home sales and only a slight decline in existing home sales.

Housing sales may slow in 2005 as interest rates go beyond 7 percent, said Doug Duncan, MBA’s chief economist.

Lawrence Yun, senior economist with the National Association of Realtors, believes interest rates will reach 7 percent by the end of this year. But, Yun said, that assumption was already factored into the association’s forecast, which means the Fed’s actions are not prompting revisions.

“Generally mortgage markets anticipate what the Federal Reserve will be doing, so they move long-term interest rates much before the Fed does raise rates,” Yun said.

He said 2004 is likely to set another record in home sales, thanks in large part to the hot resale market during the first six months. They may slow slightly, however, during the latter half of the year.

“Higher rates will put a little bit of a damper on the sizzling home sales activity we’ve been seeing,” Yun said.

But it likely won’t be too significant, he said, especially given mitigating factors such as strong job creation. That could bring more potential homebuyers into the market. Next year, however, will show some decline in housing sales, Yun said.

The California Association of Realtors revised its forecast about two weeks ago to predict a one percent decline in sales. The group previously had predicted a two percent decline. The shift reflects a stronger than expected market during the first six months of 2004, said Robert Kleinhenz, deputy chief economist.

Sales in the second half of this year aren’t likely to be as strong as those during the second half of last year. But, he said, pent-up demand for housing in California will keep sales strong overall, despite higher interest rates.

“Even with mortgage rates climbing at this point in time, they’re very low historically,” Kleinhenz.


Send tips or a Letter to the Editor to samantha@inman.com or call (510) 658-9252, ext. 140.

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