Higher Interest Rates Won't Hurt Housing, Says NAR Forecast

July 6, 2004

WASHINGTON – Interest rates are rising due to healthy economic growth and they won't dampen the general strength of the nation's housing market, according to the National Association of Realtors®.

David Lereah, NAR's chief economist, said the cause of higher interest rates makes all the difference. "The reason interest rates are higher is that we are in a growing economy rather than dealing with inflationary pressures," he said. "This is good news because corporate profits are up 40 percent from two years ago, so companies are spending and jobs are being created at a strong pace. In the housing markets, this is largely neutralizing the effects of modestly higher interest rates."

"In fact, mortgage interest rates will remain very favorable in historic terms for the foreseeable future. One concern is for lower-income home buyers who are affected the most by a rise in financing costs—our hope is that the improving job market will provide the means to also afford decent housing at the lower rungs of the housing ladder," Lereah said.

Short-term interest rates are rising slowly, and long-term rates rose previously in anticipation of the Federal Reserve Board move last week. The 30-year fixed-rate mortgage retreated last week to 6.21 percent after reaching the 6.3-percent range in May, but should creep up to 6.7 percent by the fourth quarter. Unemployment is trending down and is expected to be 5.2 percent by the beginning of next year.

Lereah forecasts existing-home sales to hit a record 6.31 million this year, up 3.4 percent from 2003. New-home sales are expected to rise 6.4 percent to 1.16 million in 2004, also a record. Housing starts should grow by 2.6 percent to 1.90 million, the highest level since the impact of the baby boom generation in 1978.

The median existing-home price should rise 6.7 percent this year to $181,500; the median new-home price is seen at $209,600, up 7.9 percent from 2003.

NAR projects the U.S. gross domestic product to grow 4.5 percent this year, while the Consumer Price Index should rise 2.7 percent in 2004.

Inflation-adjusted disposable personal income is expected to grow by 3.8 percent this year, and the consumer confidence index will trend up to101 in the fourth quarter.

The National Association of Realtors

Contact ALTA at 202-296-3671 or communications@alta.org.