The nation’s housing market, which last year turned in its best performance since the mid 1980s, is likely this year to cool off on expectations that mortgage rates will rise, leaders of the home-building industry said Tuesday.
Chicago-area builders said they remain bullish about prospects for this year, however, on the heels of a record-setting performance.
“Housing performed remarkably well in a down economy. So if the economy improves, housing should do at least as well as 2002,” said Buz Hoffman, president of Lakewood Homes, which expects to be the No. 1 builder in the Chicago area in 2003 by constructing 1,500 homes.
Richard J. Brown, chief executive of Cambridge Homes, said a slight uptick in mortgage interest rates could stimulate “some people [to] rush in to buy before rates go even higher.” Brown estimates that Libertyville-based Cambridge will build 1,400 homes this year.
Last year construction in the six-county Chicago area rose about 3 percent, to 38,992 units from 37,997 in 2001, said housing consultant Steve Hovany, of Strategy Planning Associates, Schaumburg.
Nationally, housing starts and sales are expected to be off about 3 percent this year because the economy is unsettled by factors ranging from possible war to Wall Street scandals, said David Seiders, chief economist for the National Association of Home Builders. Housing continues to boom because “other non-residential investment options are terrible,” Seiders said.
Frank Nothaft, chief economist for Freddie Mac, the mortgage giant based in Washington, D.C., predicted that average home prices across the nation will rise 3 percent to 5 percent annually for the next two to three years.
“There is no price bubble,” he added. “Local conditions drive prices, not bubbles.”
Nothaft predicted that 30-year fixed-rate mortgages will rise to between 6 and 6.25 percent by year-end from just below 6 percent.
Nothaft said that mortgage defaults peaked in late 2002 and will decline in 2003, though FHA, VA and subprime loans have had a worse performance.
He said mortgage refinancings have supported the economy “as homeowners cashed out $90 billion in 2002.”
The comments came as the Commerce Department reported that construction of new homes and apartments rose by a solid 5 percent in December to cap the best year for housing construction since 1986.
Nationwide, builders broke ground on new homes and apartments at a seasonally adjusted annual rate of 1.84 million in December, compared with a 1.75 million unit pace in November.
For the year as a whole, work was started on 1.70 million homes and apartments, up 6.4 percent from 2001. The activity was bolstered by the lowest mortgage rates since the early 1960s.
Housing starts were up 15.9 percent on a year-over-year basis last month. Single-family starts reached their highest level since 1978.
“Start with the lowest mortgage rate in decades, add some positive income growth, throw in a pinch of favorable tax treatment of capital gains on homes, top that off with a record of strong price appreciation–these produce extraordinary numbers,” said Ken Mayland of Clearview Economics.
Custom builder and architect Charles Page said 2003 should be a record year for his North Shore firm.
“The market is still churning, in part because people want something different and the latest technology,” he said.
Page added that the luxury home market will continue to prosper as long as interest rates are favorable and homeowners can upgrade. Economist Stanley Duobinis, NAHB’s director of forecasting, said that job growth is the foundation for new-home construction. But while the recession has been said to be over for a while, job growth is still sluggish and all states are not participating equally in the economic recovery, he said.
“In 2003, the housing market will erode somewhat. Single-family markets in 12 states will see growth and the multifamily market will expand in 24 states,” Duobinis said.
