“These are the best of times,” proclaimed David Lereah, chief economist for the Mortgage Bankers Association of America (MBA).
Speaking at the MBA’s 84th annual convention, he said today’s housing market is strong because of the “robust economy, which is giving people confidence to buy big ticket items.”
Lereah said the economy is generating millions of jobs, giving people the money to buy homes. Plus, interest rates are low.
“We’re almost at record levels in sales of new and existing homes and in housing starts. This could be the third best year ever for mortgage originations, an estimated $839 billion,” he said.
However, Lereah indicated that next year might not be as high-flying.
“In 1998, expect more of the same, but just a little less. There is a slight upward pressure on mortgage rates, so there could be fewer loans in 1998–maybe a total of $790 billion.”
Other numbers also are projected to be lower: Single-family housing starts will drop 6 percent, and multifamily starts will decrease 7 percent–from a total of 1.4 million starts this year to 1.3 million in 1998.
Existing home sales will be down 4.6 percent and new home sales will be off 6.2 percent. New home prices, though, are expected to rise 3.7 percent and existing home prices will be up 3.4 percent, according to the MBA forecast.
While an economic downturn is not in Lereah’s forecast, he warned that if one were to occur, it could result in rising foreclosures and mortgage delinquencies:
“We’ve loosened credit in the last five years. The first to go in a downturn would be the marginal buyers.”
Lereah said he is concerned about low-income households that are burdened by consumer debt, which is rising faster than their incomes.
Over the next 5 to 10 years, he believes housing will be driven by favorable demographics: “The rate of homeownership in the nation, now at 65.7 percent, could rise significantly–near 80 percent–as Baby Boomers move into their peak earning years.”
Boomers, those aged 33 to 51, comprise a generation of 76 million. “Because of the number of Boomers, we’ll see an increase in homeownership, even if we do nothing else. Plus, Boomers are repeat buyers,” he said.
Lyle Gramley, consulting economist for the MBA and a former member of the Federal Reserve Board, also spoke at the MBA convention and expressed caution: “We have an amazing economy, but how long can it last?”
He noted that the economy has been on a roll in recent years and has outstripped expectations.
“People are making money. There is a tremendous boom in the stock market, which is one of the driving forces behind the economy. But I see the Fed taking action, raising interest rates before the end of the year by 25 basis points, and maybe again early next year. This may cool off the stock market,” Gramley said.
“On the other hand, the Fed doesn’t want to precipitate a crash, so they must do it carefully.”
He predicted that after the stock market fades, consumer spending and the economy will go back to a more sustainable rate of growth.
Gramley cited another possible force that could drive stocks down.
“If people wake up to the realization that stock prices are high in relation to earnings, there could be a significant retrenchment–a real negative for economic growth.”
He added that the tight labor market is putting upward pressure on wages, which could lead to inflation: “People feel secure in their jobs, and hourly wages are creeping up.”
On the bright side, today’s strong consumer confidence is good for housing starts, according to Gramley, and commercial real estate is doing well, with office vacancy rates declining.
