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The IBR is a publication of the Indiana Business Research Center at IU's Kelley School of Business

Housing

Kelley School of Business, Indiana University, Bloomington

Existing home sales have continued to be strong and should finish 2002 at a record level. The National Association of Realtors projects existing home sales of 5.44 million units in 2002 and the National Association of Home Builders projects 5.53 million units for 2002. This compares with 5.29 million units during 2001. Existing home sales should remain strong during 2003 although they may be slightly off the record pace of 2002.
Housing starts for 2002 will be at about 1.69 million units, which is the highest level since 1986, when housing starts peaked at 1.81 million units. Prior to that the highest level was a record 2.02 million units in 1978. The National Association of Home Builders projects housing starts to total 1.63 million units in 2003, just slightly off the 2002 level.

Table 1 summarizes the housing and interest rate forecast from the National Association of Home Builders, which is consistent with the forecast from the IU econometric model.

Table 1
Housing and Interest Rate Forecast

Table 1
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Mortgage rates are likely to start 2003 at a slightly lower level than the average for 2002, as rates recently dropped to record lows during the end of 2002 following the lowering of interest rates by the Fed. For the year 2003 mortgage rates are not likely to differ significantly from those during 2002 (see Figure 1).

Figure 1
Average Mortgage Rates

Figure 1

The low mortgage interest rates in 2002 resulted in a record level of home mortgage refinancings, with more than half of the borrowers taking cash when they refinanced. This has helped fuel consumer spending. It isn't likely that this level of refinancings will continue during 2003, since most homeowners have already refinanced.

It is interesting that the market value of the residential housing market is now greater than the stock market. Of course, a large part of this is the declining stock market. The market capitalization of stocks listed on the New York Stock Exchange and the Nasdaq Composite dropped during 2002 to about $11.4 trillion, down from a peak of $17 trillion in March 2000. Over the same time period rising home values and increasing housing stock from new home construction boosted the value of the residential housing market to about $13.1 trillion. Of that amount, homeowner's equity (after subtracting mortgage debt) was about $7.5 trillion.

As suggested from the discussion above, home prices have risen significantly on a national basis with double-digit annual increases in median existing home prices in many metropolitan areas. In the Midwest, the median resale home price rose 5.6 percent during 2002. This strong rise in some areas of the country spurred some talk about whether a "housing bubble" was developing, but most economists do not think this is the case. However, price appreciation should return to normal patterns during 2003, rising at one or two points faster than the general rate of inflation.

Apartment rental rates have been falling and vacancy rates rising, due in large extent to low interest rates. This has allowed more new home buyers, who would not have qualified at the higher interest rates of previous years, to qualify for a mortgage. Despite the weaker fundamentals for apartments, investor demand for apartments has been extremely strong during the past year as investors have considered real estate an attractive alternative to stock and bond investments and increased their allocations to real estate. This has increased prices for apartments, despite falling rents and rising vacancy rates. Assuming the stock market improves during 2003, the demand for apartments may drop off, although there appears to be a renewed appreciation for the role that real estate can provide in diversifying an investor's portfolio.