Freddie Mac: Housing Starts Will Be Off Slightly i
Washington, DC, January 12--U.S. housing starts and home sales should fall short of 2004's record pace, but only slightly as tame inflation helps sustain low long-term mortgage rates in 2005, Freddie Mac economists said.
Frank Nothaft, chief economist at the No. 2 U.S. mortgage funder, said housing starts should decline this year by 1 percent to 2 percent while 30-year mortgage rates are seen increasing by no more than half a percentage point.
"Higher but still modest mortgage rates means that the housing market should have another splendid year in 2005," Nothaft told a news conference.
Saying the outlook for both the housing market and economy were strong for 2005, Nothaft predicted a 3.9 percent increase in U.S. gross domestic product and the addition of 2 million jobs in 2005, roughly in line with 2004.
He pegged inflation, as measured by consumer prices, at 2.1 percent in 2005 compared with 3.4 percent in 2004.
Nothaft said he expects the U.S. Federal Reserve to make quarter-point increases in the target federal funds rate over the year, including an increase to 2.50 percent when it next meets in February.
That should lead to a narrowing in the yield curve, with short-term rates rising much more than long-term rates where upward pressure should be checked by tame inflation, he said.
Nothaft pegged 30-year fixed-rate mortgages at 6.0 percent in 2005 and 6.3 percent in 2006, compared with 5.8 percent in 2004 on average. That should nudge housing starts down 1.6 percent to 1.90 million units in 2005, he said.
Single-family mortgage originations may drop 12 percent to $2.55 trillion in 2005, and then decline to $2.30 trillion in 2006, due to a decline in refinancing that is expected to offset an increase in home-purchase originations, according to Freddie's outlook.
Still, despite rising interest rates and declining home sales in 2005, house prices are not expected to drop next year, Nothaft and Freddie Mac Financial Research Director Buchi Ramagopal said.
Nationwide, house prices jumped 10.1 percent over 2004, with the biggest gains on the West and East coasts. Housing prices should climb 7.2 percent in 2005 and 6.3 percent in 2006, Freddie said.
"There is a fair amount of navel-gazing going on as to whether this is out of control and whether there is some sort of a speculative bubble at work over here," Ramagopal said.
Interest rates, he noted, remain at 25-year lows. The supply of housing for sale is low and transactions costs for flipping real estate remain high compared with other investments, Ramagopal said.
"We believe that there are a large number of reasons why we don't believe there is a speculative bubble in house prices," he said.
