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A Look Ahead: 2005 Will Be Strong, But Tempered
After
the huge explosion in 2003 and the slight leveling off in 2004, what can
we expect from the housing market 2005? Is the economy going to improve?
Will the unemployment rate rise or fall? Will housing prices continue to
spiral upwards? Will interest rates go up?
And
most importantly: Is 2005 the year the proverbial bubble finally bursts,
or will the current trends continue?
Most
likely, the latter will be the case. Although the real estate boom and record-breaking
housing activity may be behind us, the market in 2005 still looks to be as strong as—or almost as
strong as—the market of 2004.
As
always, the economy is the key predictor for real estate conditions.
Overall, the general statistics are good; at the end of 2004, the
leading economic indicators increased for the first time since March (up
0.2 percent from October). Third quarter results from 2004 were even
better than many experts believed as the economy advanced at an annual
rate of 4 percent to finish out the year on a high note. Over the last
six calendar quarters, the economy has grown at a rate of 3 percent or
better and experts predict this trend to last throughout 2005.
In
late 2004, the Council of Economic Advisors (CEA) released their
forecast for 2005’s unemployment rates, which are indirectly tied to
the housing market. In the report, the CEA predicted the unemployment
rate will fall to 5.3 percent in 2005, down from 5.5 percent in 2004. In
the second half of this year, unemployment could possibly fall below the
5 percent mark. And although job growth is expected to slow over the
next year, experts still believe close to 200,000 jobs will be created
each month in 2005.
As
the market finished strong in the last quarter of 2004, the National
Association of Realtors (NAR) has upped their forecasts for median home
prices and existing home sales for 2005. Despite housing starts dropping
in the latter part of last year, housing demand is still high and
experts believe that demand will continue, thus raising median home
prices. According to the NAR, the median price for a new home should
increase 8.9 percent (from $195,300 in 2004 to $214,600 in 2005). For
all homes, the NAR is predicting a modest 5 percent gain. In terms of
existing home sales, 2005 is shaping up as the second-highest selling
year on record: 6.38 million houses are expected to be sold.
Finally,
and most importantly, are the interest rates. Although short term
interest rates were raised five times in 2004, further rate increases
should be mild as long as inflation remains fairly low (below 3
percent), which it should. The NAR is predicting the 30-year fixed-rate
mortgage to average 6.4 percent in 2005—up from 2004’s year-end rate
of 5.81 percent. Almost all experts believe such rate hikes will occur
gradually over the year so as to avoid panic in the housing market; as
long as the Federal Reserve does not raise the interest rate too often
or too quickly (which it hasn’t in the past), mortgage rates will
remain at a manageable and affordable level.
Overall,
the real estate market is shaping up to be more like the slow-and-steady
market of 2004 rather than gangbusters market of 2003, but don’t
forget that we saw plenty of high watermarks last year. Expect that to
continue in 2005, but at a less rapid pace.
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