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Can Anything Stop The Housing Market?

Experts Predict Steady Gains in 2005, But More Moderate Than in Past Years

By Daniela Deane
Washington Post Staff Writer
Saturday, January 1, 2005; Page F01

Last year, it seemed real estate in the Washington area could only go up.

Sales were up. Prices were up, too -- spectacularly. The price of an average house in the metropolitan area surged 24 percent from the third quarter of 2003 to the third quarter of 2004, according to the Office of Federal Housing Enterprise Oversight.

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Nationwide, housing performed extremely well, too. Average home prices went up 13 percent through the third quarter of 2004. Existing-home sales, new-home sales and housing starts all hit records for the fourth year in a row.

Can this continue into 2005? What, if anything, can stop housing?

Most housing economists and market watchers believe that things will scale back from the mighty heights of this year and that home price appreciation, sales and construction will all moderate. (Of course, many of these same experts also predicted moderation, not records, last year and the year before that.) Even so, they predict a healthy year ahead nationally.

For the Washington area, the outlook is even rosier. Economists say our area's real estate market will outperform the nation. They cite the tens of thousands of jobs that are expected to be created in the area next year, mostly by the federal government and federal contractors. Demographic trends -- foreign immigration, domestic migration and longer life spans -- are also factors.

Still, housing is particularly sensitive to rising interest rates, and there are some economic situations that could push up rates, economists say. The situations are:

• An ever-ballooning budget deficit.

• A further deteriorating dollar.

• A significant downturn in the national economy that would cause big job losses.

• A terrorist attack that would drive up oil prices or interrupt oil supplies.

Barring any of those, housing should remain vibrant in 2005, economists say, particularly here.

Here's what the experts predict for this year:

Home Prices

"We'll see double-digit appreciation gains in 2005 in the Washington area. Not the 25 percent we saw this year, but low double digits. In some local jurisdictions, it'll be in the 8 to 10 percent range. For good product, we'll see appreciation of 10 to 12 percent. We've been overspending on housing for three years. I don't see a quick slowdown.

"Job growth this year will exceed that of last year. Last year, we created 72,000 jobs here. This year, it'll be more like 75,000 to 78,000."

-- Stephen S. Fuller

regional economist,

George Mason University

"We see house price appreciation continuing, but at a much more moderate pace. It's unrealistic to expect double-digit appreciation year after year after year, especially with mortgage rates slowly drifting higher. We believe house price appreciation nationwide will slow from about 10 percent to 7 percent in 2005.

"But the Washington metro area will be much stronger than the average. We don't have a model projecting local markets, but I see the Washington market coming down to about 10 percent appreciation, ballpark figure."

-- Frank Nothaft

chief economist,

Freddie Mac

"We won't be able to maintain the recent house price appreciation we've been seeing. How much it'll slow down, who the heck knows? Maybe appreciation of 5 to 6 percent nationally this year. Flat and slightly down in some metro markets.

"The Washington market is gilt-edged. The strength of the economic base here is great. History has shown us that there are no price declines unless there's a significant problem in the economy, like job losses and outmigration. That's not going to happen here. Here, we'll see prices rise higher than the national average, let's say, 7 to 8 percent."

-- David Seiders

chief economist,

National Association

of Home Builders

"There's no price bubble in this country. Could there be some local bubbles? Yes. Here? No. Here, the supply of homes is too lean, the fundamentals are too good, job growth is good, we can afford to purchase the homes and interest rates are low.

"My projection for prices is 8 percent price appreciation this year nationally. That's still very healthy appreciation but it will have slowed. It's air coming out of the balloon rather than the balloon popping."

-- David Lereah

chief economist,

National Association

of Realtors

"There's a lot of evidence that there is some weakness in the housing market already. Prices have been overvalued for some time. If we see the kind of rise in rates that I think we will, the market will take a very big hit.

"There will be price declines next year, absolutely. I'd say 10 to 15 percent in the D.C. area. It's hard to predict the timing, but I would've expected it to happen two years ago.

"New jobs aren't enough to affect the housing market qualitatively. The price increase due to higher mortgage rates swamps the impact of new jobs."

-- Dean Baker


Center for Economic

and Policy Research

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