Despite signs of a slight softening in the real estate market, industry associations project that the market will remain robust in 2005. After a record-breaking 2004, with expected purchase mortgage originations of nearly $1.48 trillion, purchase originations are forecast to moderate a bit to $1.45 trillion in 2005, according to the long-term forecast by the Mortgage Bankers Association. The refinance market is expected to decline from $1.19 trillion in 2004 to $68 million next year and $46 million in 2006.
"We see a number of demographic, economic and industry trends that are supporting home buying," said Jay Brinkmann, MBA's vice president of research and economics. "First, low rates are keeping mortgage payments very competitive with apartment rents, so we see apartment vacancy rates increase as homeownership rates increase. Second, low mortgage payments are opening homeownership opportunities to many immigrant families. Third, the mortgage industry has shown itself adept at using the capital markets to bring greater liquidity to a number of innovative products like hybrid ARMs, low documentation loans and loans to borrowers who want to buy a house while they are still rebuilding their credit."
The National Association of Realtors is also predicting that 2004 will be a record-breaking year and that 2005 will reach near-record levels for new and existing home sales. NAR projects that there will be 6.55 million existing-home sales this year as opposed to last year's record-setting 6.1 million existing home sales, a rise of 7.3 percent. New home sales are expected to reach a record 1.17 million in sales for 2004, an increase of 7.7 percent from 1.09 million sales in 2003. Housing starts are forecast at 1.93 million units in 2004, up from 1.85 million in 2003; housing construction is expected to come in at approximately 1.84 million units in 2005.
"At the beginning of 2004, forecasters were calling for a gradual rise in mortgage interest rates, but we've experienced a pleasant surprise for the housing sector," said David Lereah, chief economist for NAR. "The 30-year fixed-rate mortgage is now hovering close to 5.7 percent, and even though we're expecting rates to rise slowly, they will stay in a historically low range and a strong momentum of home sales will carry over into 2005."
In June, Freddie Mac reported the 30-year fixed-rate mortgage averaged 6.29 percent. The national median existing home price is expected to grow by 6.9 percent this year to $181,700 and the median new home price is seen to increase nine percent to $212,600. The median existing-home price is projected to rise 5.3 percent in 2005, while the typical new home price will grow by 5.2 percent.
"We should see somewhat slower price appreciation in 2005, but as we enter the year with inventories remaining low, home prices will continue to rise a little faster than historic norms," said Lereah.
Likewise, condominium/co-op sales are also on pace for a record-setting 2004. While slowing a bit from the 1.01 million units of sales activity in the second quarter of 2004 to the seasonally adjusted 990,000 units in the third quarter, this is still 5.2 percent above the 941,000-unit level of sales activity in the third quarter of 2003. The median existing condo price was $197,000 in the third quarter of 2004, 18 percent higher than in 2003. The median condo price has been rising at more than double the rate of increase of the median price of single-family homes.
The year 2004 has been exceptional for the real estate industry, but a few minor bumps in the road do appear ahead. While residential markets remained robust in most parts of the country, in September and early October there was a softening from the activity during the summer, according to the Federal Reserve Board's Beige Book.
Evidence of this softening can also be seen in figures released by the U.S. Department of Commerce. The U.S. homeownership rate fell to 69 percent in the third quarter from 69.2 percent in the second quarter, with the rate for African Americans falling the most, from 49.7 percent to 48.4 percent. While the ownership rate for whites also fell slightly, Hispanics made some gains. This was undoubtedly due to the decrease of the typical American familys ability to afford to buy a median priced home.
The NAR composite Housing Affordability Index stood at 128.6 in the third quarter of 2004, down from a revised 136.2 a year earlier. The latest index number means that the typical American household had 128.6 percent of the income necessary to purchase a home at the third quarter median existing home price, which was $188,500. There was also a decline of housing starts, which dropped 8.2 percent in September to a seasonally adjusted rate of 1.54 million units according to Commerce Department figures. Overall starts, which include multi-family housing, came in at 1.90 million units, declined six percent from the previous months results.
Despite these negative numbers, the trade associations remain very optimistic and see no signs of the dreaded "housing bubble" on the horizon. They believe the fundamentals are in place for sustained growth in 2005.
David Lereah expects a gradual easing in the housing sales pace in the first quarter of 2005, with the housing market "coasting at historically high levels as mortgage interest rates rise. At this pointwith strong fundamentalswe project next year  will be the second-best overall year for the housing market."