2004 Economic Outlook: The Return of Growth

New year should bring solid residential sales, rebounding commercial sector

December 1, 2003

With 2003 shaping up to be yet another stellar year for residential sales, it’s fair to ask if business can get any better in 2004, especially with the prospect of interest rates inching up as the U.S. economy gains momentum.

The answer is likely to be yes, but with caveats.

Residential sales will stay strong, although not as strong as in 2003. Commercial activity will build on the turnaround that practitioners began to see in mid-2003 after a two-year lull.

But the commercial turnaround will be mixed: Retail is poised to see continuing solid gains; offices and warehouses will strengthen at a modest pace as employment and business spending improve; and multifamily will begin to reap the benefits of rising interest rates.

Home sales: the engine that could

“We expect home sales to moderate but remain historically strong in 2004,” says David Lereah, NAR’s chief economist.

Indeed, the NATIONAL ASSOCIATION OF REALTORS® forecasts sales of 5.4 million existing single-family units, 840,000 condos, and 950,000 new-home units in 2004. That’s coming off a stellar 2003, in which sales of existing homes, new homes, and condos will probably reach 7.8 million. Home price appreciation will ease in 2004 to about 5 percent, down from 7 percent.

The 2004 projection assumes interest rates, which hovered at just above 6 percent for much of 2003, will inch up to just under 7 percent by the end of the year. That’s still low by historic standards, though the increase could put a slight chill on sales.

Not to worry, though. Lereah says the improved economy will offset the impact of rising interest rates. After getting by with growth of 2.4 percent in 2002 and 2.8 percent in 2003, the economy is expected to grow 4 percent in 2004, led by businesses as they replenish inventories and accelerate capital investment. The improved business picture builds on the turnaround that began in 2003 when, after a two-year hiatus, corporate profits turned positive and business spending resumed.

The business turnaround comes at an opportune time. After accounting for much of the spending growth in the economy during the slowdown and helping to prevent a full-fledged recession, consumers are tapped out. Income growth has been stagnant at roughly 3 percent for 2003, and job losses hit 2.7 million over the last two years.

It was wealth gains from their home equity that enabled consumers to keep spending. Equity accumulation added some $30,000 to household wealth on average over the last three years, NAR figures show. And many homeowners tapped these funds to improve their positions—remodeling their homes, investing in businesses, and covering education costs. Refinancing is expected to total $2 trillion in 2003, a record.

Of course, there’s a negative side to this spending boom: Consumers have assumed heavy debt loads and depleted their home equity cushions. And with the homeownership rate at a record 68.4 percent in the third quarter of 2003, according to the U.S. Census Bureau, many households in a position to buy have bought, which could mean a reduction in demand.

Still, demand is expected to remain strong among groups that posted gains this year: singles, women, and minorities. The homeownership rate for African Americans, Asian Americans, and Hispanics, for example, is still at around 50 percent, compared with 75 percent for white households.

The figures suggest much of the homeownership growth in 2004 and over the next several years could come from first-time buyers and minority households, making affordability and related matters—low inventories of entry-level stock and regulation of subprime lending—key issues.

Commercial sales: tuning up

The same trend that will slow home sales slightly in 2004—an improving economy pushing up interest rates—is likely to benefit commercial real estate, particularly multifamily housing.

After tumbling in early 2001 when tech and telecom stocks fizzled out, commercial activity began to see glimmers of improvement in mid-2003.

Of the main property sectors, retail has stood up the best during 2002 and 2003, thanks in part to home-equity-driven strong consumer spending, up a projected 3 percent in 2003. And more spending is projected for 2004 as income growth improves.

Net absorption of retail space over the past two years—including a projected 99 million square feet in 2003—has largely remained steady. Vacancies, although increasing, remain at a sustainable level, 12.3 percent in 2003, compared with 16 percent in the mid-1990s. And rental rates have remained level.

With the economy picking up for 2004, retail should do even better. NAR forecasts net absorption to increase by 113 million square feet, vacancies to ease to 11.5 percent, and rental rates to improve by 1.4 percent. Chicago, Dallas, and Los Angeles are expected to see the strongest new-construction activity.

Office space has been among the hardest hit during the downturn. The sector started reeling after the tech and telecom stock troubles began. Vacancies surged from 9.9 percent in 2000 to 17.7 percent in mid-2003. Absorption remained in negative territory throughout 2002 and much of 2003 as existing projects contended with new product, planned in the heady late 1990s.

The sector’s fortunes are expected to start turning around in 2004 as the economy improves. Absorption is expected to be positive, reaching 114 million square feet by year’s end, up from 38 million square feet in 2003. That will be helped not just by increased demand for space but a cooling in new project completions. As a result, vacancies will come down, from 17.7 percent in 2003 to 16.4 percent. And rental rates will improve by 2.2 percent. Houston, Los Angeles, and Washington, D.C., should lead the pack in new projects.

Warehouses were also hit hard by the downturn, as manufacturers scaled back production and let inventories run low, a move that contributed to a portion of the country’s unemployment hike over the past two years.

Employment is starting to come back, with the country seeing gains of about 50,000 jobs in the latter part of 2003. More are on the way. Roughly 100,000 jobs will be created per quarter in 2004, according to the U.S. Department of Labor.

“Many industries, including the hard-hit manufacturing sector, are now facing increased demand,” which will require employees, says Lereah.

Net absorption is expected to improve from 64 million square feet in 2003 to 108 million in 2004; vacancies will decrease from 10.4 percent to 9.3 percent by 2004; and rental rates will rise by 3 percent. The most active construction markets will be Chicago, Denver, and San Antonio.

Multifamily housing was negatively impacted by strong homeownership gains as renters seized on low interest rates to become buyers. But the sector should see improvement as home sales cool. Rising interest rates and continuing strong price appreciation could slow the flow of renters to homeownership, helping to stem vacancies, which plateaued at more than 7 percent in 2003, compared with about 5 percent two years earlier.

In 2004, vacancy rates are expected to ease to 6.6 percent. That will aid absorption, which began making gains in 2003. Absorption hit 122,000 units in 2003, up from 46,000 in 2002. Rental rates will rise about 1 percent as landlords ease rent concessions to attract tenants. The heaviest development is expected in Dallas, Los Angeles, and New York.

As the economy heads into 2004, the commercial sector won’t be the star that residential has been but will likely play an increasingly solid role as the economy builds momentum and starts firing all engines.

Economic indicators:

Inflation rate
2002 1.6 percent
2003 2.4 percent
2004 1.6 percent

Gross domestic product
2002 2.4 percent
2003 2.8 percent
2004 4.0 percent

Unemployment rate
2002 5.8 percent
2003 6.0 percent
2004 5.5 percent

Interest rates
2002 6.5 percent
2003 6.5 percent
2004 6.7 percent

Existing-home price increases
2002 7.0 percent
2003 6.8 percent
2004 4.9 percent



2002 5.6 million
2003 5.9 million
2004 5.4 million

2002 820,000
2003 860,000
2004 840,000

New homes
2002 973,000
2003 1,030,000
2004 950,000

Source: NAR Research


Vacancy rate
2002 12.5 percent
2003 12.3 percent
2004 11.5 percent

Rental rate
2002 –0.3 percent
2003 0 percent
2004 1.40 percent

Net absorption
2002 71 million square feet
2003 99 million square feet
2004 113 million square feet


Vacancy rate
2002 17.3 percent
2003 17.7 percent
2004 16.4 percent

Rental rate
2002 –7.6 percent
2003 –5.6 percent
2004 2.2 percent

Net absorption
2002 –46 million square feet
2003 38 million square feet
2004 114 million square feet


Vacancy rate
2002 10.3 percent
2003 10.4 percent
2004 9.3 percent

Rental rate
2002 –4.3 percent
2003 –2.8 percent
2004 0.3 percent

Net absorption
2002 31 million square feet
2003 64 million square feet
2004 108 million square feet


Vacancy rate
2002 7.1 percent
2003 7.1 percent
2004 6.6 percent

Rental rate
2002 –3.2 percent
2003 –2.0 percent
2004 1.2 percent

Net absorption
2002 46,000 units
2003 122,000 units
2004 164,000 units

Source: The 2003 NAR Profile of Real Estate Markets: United States of America

Robert Freedman

Robert Freedman is the former director of multimedia communications at NAR.

Notice: The information on this page may not be current. The archive is a collection of content previously published on one or more NAR web properties. Archive pages are not updated and may no longer be accurate. Users must independently verify the accuracy and currency of the information found here. The National Association of REALTORS® disclaims all liability for any loss or injury resulting from the use of the information or data found on this page.