10 More Good Years
(November 6, 2004) -- ORLANDO, Fla. – The size of the existing-home market has doubled since the real estate boom began in 1992 and while sales may drop slightly from the record 6.55 million for 2004, the current real estate boom "will not bust," NAR Chief Economist David Lereah told attendees at the Economic Issues & Residential Real Estate Business Trends Forum on Friday here. The forum was part of the 2004 REALTORS® Conference & Expo, which runs through Nov. 8.
"You need a bubble to bust and except for a few local markets, we don't have one," he said. Lereah noted several reasons that with the exception of a few local markets, a real estate bust didn't exist. Housing prices may have appreciated faster than income in the last few years, but they significantly lagged income during the 1980s and early 1990s. "Now we're just playing catch-up," he said.
Home prices have jumped, with an annual average nominal increase of 4.2 percent between 1992 and 2004. Yet the real news is the average annual real increase of 2.5 percent, compared with only a 1 percent to 1.5 percent increase during the 1960s through the 1980s. "That's the real boom," said Lereah.
Even better news, he said, is that the continued expansion of the real estate market should last for another decade, fueled by several solid underpinnings: low interest rates, strong demographics, immigration, a lean housing supply, and recent innovations in housing finance. He predicted that between 2005 and 2014, existing-home sales should average between 6.1 million and 6.4 million units annually.
But while good markets will continue, the recent pace of price appreciation isn't sustainable, said Lereah. Recent average sales growth has been 7 percent for existing homes and 8.2 percent for new homes, while a healthy boom can sustain an average 5 percent growth. "We want healthy growth so the market can be sustained, not frenetic, double-digit growth that can't last," he said.
Some factors that could derail the boom include oil prices rising near $80 a barrel, interest rates rising to 9 percent, or a resurgence of inflation brought on by a burgeoning budget deficit. The deficit poses "the single biggest enemy to our industry," said Lereah. The current deficit of $420 billion represents 3.6 percent of the Gross Domestic Product, less than the all-time high of 5 percent during the Reagan years.
Other threats include pressure on mortgage-interest deductions as part of tax reform, a Bush administration that favors banks over real estate, and a weakening or privatization of Fannie Mae and Freddie Mac.
Still, Lereah expects the real estate boom to continue for the next decade. He predicts that mortgage rates will not rise above 7.5 percent in the next decade and that existing-home sales will remain between 6.1 million and 6.4 million annual units as long as economic expansion continues.
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