Housing market outlook cools a bit

Economists expect interest rates to slow escalating home prices and construction, but they still foresee a solid year ahead

Friday, December 10, 2004
DYLAN RIVERA
The blazing pace of home price appreciation and housing construction should ease next year as climbing interest rates constrict demand, three economists forecast Thursday in Portland.

But none predicted that the Portland-area real estate market will decline in 2005.

With slightly more than 10,000 residential permits expected for new houses in 2004, the year is looking like the best for builders since 1996. However, permits for new single-family homes may drop 5 percent to 10 percent next year, said Jerry Johnson, principal of Johnson Gardner consulting in Portland.

"So you may be going back to 2002 levels, but for most builders 2002 was a great year, so it's not a disaster scenario," Johnson said.

Portland-area home sales through October averaged $244,600, nearly 10 percent higher than the average for all of 2003, according to the Regional Multiple Listing Service. But Johnson said 2005 would probably see a boost of about 5 percent.

Such predictions formed the main presentation at an annual forecast event at the Oregon Convention Center sponsored by the Home Builders Association of Metropolitan Portland. Johnson gave a local prediction; Michael Carliner, staff vice president of economics for the National Association of Home Builders, discussed national trends; and state economist Tom Potiowsky reviewed Oregon's economy.

All agreed that interest rates will gradually rise during the next year, dampening rates of home building, sales and price appreciation. But each hedged on how much the rates would drop in light of factors as wide-ranging as energy prices, business spending and the national debt.

"There's no housing bubble in Portland that's going to burst," Johnson said. "But there's going to be a slowdown now."

The historically low interest rates for 30-year fixed home mortgages that fueled home buying in recent years are disappearing. They reached a record low in June 2003 of 5.21 percent, then hovered around 6 percent this year, according to weekly surveys by mortgage giant Freddie Mac.

Those rates probably would rise to 7 percent by the end of 2005, Carliner said. Interest rate increases to higher than 7 percent would hold down real estate sales -- and price increases -- by disinclining prospective buyers from trading up on housing. Many will not want to give up 5 percent to 6 percent mortgage rates they have on their current homes, the economists agreed.

The sober forecasts didn't appear to worry housing industry executives.

David Dresser, senior vice president of Action Mortgage in Lake Oswego, which lends to homebuilders, said interest rates are still low by historical standards. Dresser said he remembers double-digit mortgage rates in the early 1980s.

"I'm looking at interest rates I thought we'd never get to," said Dresser. "If people want to buy a house at 7 percent, they'll figure out a way to do it. It's 12 percent that killed us."

Marcia Kies, a real estate agent for more than 20 years, said rising interest rates could provoke emotional reactions from buyers.

"They either panic and don't buy for a while because they're freaked out by it, or they realize they have to get it before it gets worse," said Kies, a top producer with The Hasson Co. in Lake Oswego. "After a while, it becomes the status quo."