'Healthy' Housing Market on Tap Despite Slower Economic Growth

Our 1997 forecast

February 1, 1997

So you're wondering what kind of year 1997 will be. You're eager to know whether brisk housing activity will be in your future this year.

Relax, say the economic gurus who frequently deliver their housing forecasts to the media. Although 1997 may fall short of record-breaking activity nationally, home sales will be respectable, indeed.

''It will be a healthy housing market but not as high as last year,'' says David Lereah, chief economist for the Mortgage Bankers Association of America. He says 30-year fixed-rate mortgages are expected to climb from 7.6 percent in early January to more than 8 percent, where they’ll hover throughout 1997. He says interest rates for one-year adjustable-rate mortgages are likely to approach 6.1 percent this year, up from about 5.75 percent in January.

''We think we’re going to see a contraction in housing starts and existing- and new-home sales,'' Lereah says. ''Higher interest rates will contribute to inhibiting activity somewhat. Millions of jobs were generated last year, and that helped consumers buy homes. In 1997 you're almost at full employment, so how many more jobs can you create? Interest rates will still be historically low, but they will be drifting up somewhat.''

As far as home sales go, October and November may be hard to beat. Relatively low interest rates boosted new-home sales to the highest level in nearly four years in November, according to the Commerce Department. It says new-home sales rose 14.2 percent to a seasonally adjusted annual rate of 772,000. In October new-home sales were revised to a seasonally adjusted rate of 676,000 units.

In November existing-home sales reached a seasonally adjusted annual sales rate of 4.04 million, up 1.8 percent from the October rate of 3.97 million units, according to the NATIONAL ASSOCIATION OFREALTORS®.

''In 1997 there will be a drop in existing-home sales by 5 percent to 7 percent to the 3.85 million range,'' says NAR Chief Economist John Tuccillo. He says he expects 30-year fixed interest rates to level off to about 7.5 percent between now and June.

''The economy is slowing down; there's slower job growth, so we'll get slower housing sales,'' he says. ''We're dealing with a market that has used up a lot of pent-up demand; 1996 brought a lot of people into the market, but that means it took a lot of people out of the market.''

David Berson, chief economist at Fannie Mae, says he believes a slightly higher unemployment rate this year will force some consumers to forgo homebuying. He anticipates a 5 percent drop in existing-home sales and a 10 percent decline in new-home sales.

''Consumer spending is expected to be modest because of high levels of debt payment,'' he says, adding that interest rates will average about 7.5 percent this year. ''Still, 1997 will be a pretty good year.''

Carole Fleck is a former senior editor for REALTOR® Magazine.

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