Editor’s note: The real estate industry is heading for big change in 2005. Experts once again are predicting slower home sales and easing price appreciation due to an anticipated rise in interest rates. In this Inman News forecast series, we attempt to get a clear picture of the industry next year, including what we can expect from housing numbers, who the industry should be watching and what the best and worst-case scenarios might be for housing in 2005. (See Part 1: The interest rate roller coaster ride; Part 3: Worst-case scenario for housing next year; Part 4: What will happen in 2005? Part 5: 15 people to watch in 2005; and Part 6: Inman News Readers 2005 Real Estate Forecast.)

A combination of sluggish job growth and an economy that loses a little energy might be the best thing that could happen to the housing industry next year in some experts’ opinions.

David Lereah, chief economist for the National Association of Realtors, believes these factors will keep mortgage rates low and provide a “positive shock to the housing sector.”

Mark Dotzour, chief economist at Texas A&M University’s Real Estate Center, calls moderately sluggish job growth, low interest rates and positive home price appreciation “the perfect storm for residential real estate sales volume.”

Not everyone agrees that sluggish job growth would be part of the housing industry’s best-case scenario for next year – some believe job growth would mean more people able to purchase homes. But they do agree that continued rock-bottom interest rates certainly would be ideal. Continued low rates combined with other factors would prolong the industry’s record success.

Forecasts for next year don’t foresee a record year for home sales. Instead, NAR is forecasting a second-best year. Lereah is quick to point out that he thought 2004 would be the second-best year on record, but it instead will end up being the best year. Next year could turn out the same way, making record home sales part of the industry’s ideal 2005.

James Wright, president/principal broker of Century 21 All Islands in Honolulu, said his dream situation would be for 2005 sales to match those of 2004. He also would like to see price appreciation rates between 5 and 7 percent, rather than rates in the double digits. Rates in the 5 to 7 percent range would still be high enough to interest investors, but not so high that they would seriously hamper affordability like higher rates might.

“Otherwise we will run out of people’s expendable income at some point,” Wright said.

Delores Conway, director of the Casden Forecast for the USC Lusk Center for Real Estate, also sees modest price appreciation as a best-case scenario. If an increase happens too quickly, too many buyers will be priced out, she said.

In Wright’s best-case scenario, the economy also would keep improving long enough for the Baby Boomers’ wealth to continue. They are investing heavily in second homes, and the Hawaiian market has been the beneficiary of much of that money, Wright said. The market also has benefited from foreign investors attracted by the islands’ exotic beauty and the dollar’s weak value against key currencies such as the euro and yen.

Although many economists view the dollar’s continuing weakness as a worst-case scenario, some like Wright view it in a more positive light. If it keeps up, foreigners will continue to invest in real estate in Hawaii and elsewhere around the country.

As the stock market improves, investors in general will likely turn their attention away from real estate and back toward stocks and bonds. But that’s not likely to happen in 2005, Dotzour said. He expects distrust of corporate accounting and an underperforming stock market will keep investors interested in real estate instead.

Some observers view reform of the government-sponsored enterprises, Fannie Mae and Freddie Mac, as potentially positive developments for the industry next year.

Both Fannie and Freddie are shareholder-owned but chartered by the federal government to maintain a constant flow of mortgage funds for thenation’s housing market. The two corporations securitize and either resell or own a substantial portion of the outstanding home mortgage debt in the United States. They are vital to the housing industry because the secondary market helps increase the liquidity of mortgage funds, making home loans more widely available.

Both companies have been entangled in accounting scandals. Freddie Mac first rattled investors last year with a $5 billion earnings restatement, a $125 million fine and a top management shakeup. This year, Fannie Mae has drawn the attention of federal regulators, who allege pervasive accounting problems at the company. The allegations also have prompted congressional hearings, a formal investigation by the Securities and Exchange Commission and a round of shareholder lawsuits.

The scandals at both companies have resulted in more proposals for increased oversight.

Steve Kropper, SVP at Equinox, expects the government to more heavily regulate Fannie Mae and Freddie Mac. While that may cause some pain initially, it will ultimately benefit the industry because it will make the two more accountable for their actions, he said. That accountability should help increase confidence in Fannie and Freddie.

Dotzour agreed, saying he doesn’t believe the heavy scrutiny the two companies have been under lately has impacted the market. Instead, the market needs to know Fannie and Freddie – vital to the industry’s success – are being watched.

“Everybody is going to feel more secure in investing in Fannie Mae stocks and bonds knowing there’s a lot heavier scrutiny of the accounting,” Dotzour said.

Next year also would ideally bring a bigger emphasis on so-called emerging markets – minorities and immigrants, said Terry Bivins, SVP of First Reverse Mortgage Store and president of the Illinois Association of Mortgage Brokers. More lenders are viewing those groups as the real estate and mortgage products customers of the future. An increasingly diverse range of mortgage products will help more people in those groups become homeowners, said Richard Sommer, CEO of HomeGain.

Sommer said he ideally could also see real estate agents picking up their adoption pace of technology and shifting more of their advertising dollars to the online sphere. He also believes if the United States leaves Iraq next year, some of the pressure on the federal budget deficit would ease, which also would help ease pressure on interest rates.

HomeGain founder Bradley Inman is also the publisher and founder of Inman News.

From a larger economic perspective, most best-case scenarios involve no real shocks to the economy. Stephen Thode, director of Lehigh University’s Murray H. Goodman Center for Real Estate Center, would like to see oil prices drop, decreasing the risks of inflation and a possible corresponding rise in mortgage rates. Now, he said, oil prices are hanging over the market.

Of course, a real boon to the industry would be interest rates not rising at all next year and even dropping. Few people believe that will happen next year. The most realistic best-case scenario is what economists already are predicting – a gradual rise in mortgage rates, leading to a strong year of home sales.

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

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