ORLANDO -- Mortgage costs may go up in the months ahead, but that didn't put
a damper on the housing industry's weekend bash.
At their annual convention in Florida, 95,000 homebuilders and others from
the residential construction industry were more put off by the rain than any
clouds in the 2005 building forecast.
But economists told the National Association of Home Builders to watch
out for a slight dip in new-home sales this year.
Higher interest rates and rising inventories of unsold new homes could cause
single-family housing starts to drop 3 percent, economists predict.
"That's not down much compared to the current record pace," said Frank
Nothaft, the top economist for Freddie Mac, one of the country's largest
mortgage providers. "I think we are going to have a pretty good housing market
overall."
Builders started about 1.6 million single-family homes in 2004 -- an all-time
high. This year, the forecast is for 1.55 million starts, which would make 2005
the second-busiest year on record.
The forecast presumes that mortgage rates will move up only slightly this year.
The home builders association expects finance costs to average 6.3 percent this
year on a 30-year loan, compared with an average of 5.8 percent in 2004. The
increase would add about $50 a month to payments on a $150,000 fixed-rate mortgage.
"The big surprise last year was how low mortgage rates remained," said Mr.
Nothaft, who, like most analysts, had expected interest costs to rise faster.
But a sluggish economic recovery kept mortgage costs down.
If the economy heats up this year, that would increase interest rates, he said.
"If it turns out economic growth is much more rapid or we see the inflation
genie come out, mortgage rates will move higher, and that will translate into
a weaker housing picture," Mr. Nothaft said.
Last year was the fourth consecutive year of higher home starts.
"The U.S. homeownership rate climbed to a new record in 2004, and there's
still a lot of potential going ahead," home builders association economist
David Seiders said in his forecast for 2005.
Mr. Seiders believes that strong demographics -- including immigration -- are
also driving the home market.
Home appreciation, which has outpaced inflation during the last few years, is
expected to slow this year.
Fannie Mae, one of the largest mortgage companies, says home appreciation
will drop from near 10 percent in late 2004 to 3.5 percent on average this year.
None of the mortgage and building experts anticipate a slide in home prices.
"Home prices should grow at a modest, healthy pace," Daniel Mudd, the
interim chief executive of mortgage provider Fannie Mae, told builders. "It's
true -- some local housing markets may be overheated and are bound to cool down.
But the fundamentals of the national housing market are sound."
New-home prices are unlikely to fall because builders are getting hammered by
higher costs.
Expenses for everything from land to labor to government fees are going up. At
the same time, a super-competitive market is making it tough for builders to
raise prices.
"Profit margins may be squeezed to some degree," Mr. Seiders predicts.
Builders have seen a dramatic increase in the cost of building materials in
the last two years. And about 80 percent of builders surveyed recently said
they had seen steeper hikes in the cost of concrete, wallboard, steel and
lumber in the last six months.
Still, building industry forecasters are hoping the worst of the materials
price increases are over.
"The big hits came last year in terms of the actual prices -- a lot of builders
got burned," said home builders association analyst Michael Carliner. He
said some material prices are "now down from their peaks."
The home builders association blames production limits and overseas demand for
the higher costs.
If the U.S. commercial real estate market bounces back this year with more
construction, it could put more pressure on building materials, Mr. Carliner
said. "You might get actual problems of availability with some products," he
said.
In some areas, builders have cut back on home construction because inventories
of unsold homes are going up.
New-home inventory around the country was at its highest level in more than two
decades at the end of 2004, according to the National Association of Home Builders.
In the Dallas-Fort Worth area, home starts fell by about 10 percent in the fourth
quarter because of the increase in unsold new homes.
