- The Washington Times - Wednesday, January 19, 2005

House construction last year soared to the highest level since 1978, marking the fourth year of an unprecedented housing boom that shows few signs of letting up.

The market should get a boost again this year from rising employment levels and incomes, and mortgage rates that remain at historically low levels, economists say. Rates on 30-year mortgages last year averaged under 6 percent for a second straight year.

But while homeowners have reason to rejoice as the four-year boom has doubled the value of houses in Washington and many other areas, experts say they should be wary that a bubble has developed in some parts of the country that doubtless will burst one day.

New starts on housing projects in December surged 11 percent to an annual rate of more than 2 million units, the biggest one-month jump in seven years, the Commerce Department reported yesterday. The full-year rate of 1.953 million starts was the highest in 24 years.

“The robust U.S. housing boom is not close to fizzling out” despite predictions of its demise many times in recent years, said Roger M. Kubarych, chief economist with HVB Group.

The housing report portrays “a strong U.S. economy” as it entered the new year when combined with reports of a 0.1 percent dip in consumer prices in December and a drop in jobless claims, he said.

Few had predicted housing would be a star sector again last year, when other long-dormant parts of the economy like manufacturing came back to life. Housing had buoyed the economy during the 2001 recession and was a primary driver of growth during the sluggish recovery in 2002 and 2003.

But a rise in interest rates last year, engineered by the Federal Reserve, failed to stymie the housing market as predicted. That was because the rates on long-term mortgages, which are linked to bond rates, did not rise as much as short-term rates, which are directly controlled by the Fed.

Vigorous buying of U.S. bonds and mortgage-backed securities by foreign central banks kept bond rates low. Last year’s average mortgage rate of 5.84 percent — for a 30-year fixed-rate loan — turned out to be only fractionally above the record low average of 5.78 percent established in 2003, according to Freddie Mac, a stockholder-owned corporation chartered by Congress.

Adding to momentum in housing last year was a revival of job growth after a three-year lull. Economists say job and income growth, which is the mainstay of the housing market since most home buyers must have stable jobs to qualify for mortgages, should continue this year.

“We ended 2004 in good shape, as we exceeded expectations and wound up with records for new- and existing-home sales,” said National Association of Home Builders chief economist David Seiders.

Extraordinarily low interest rates enabled millions of renters to buy houses for the first time, pushing the homeownership rate to a record high of 69 percent of the U.S. population. The robust growth in housing needed to fulfill the “American dream” of homeownership is a boon to the construction industry.

“Home builders are headed into 2005 with very good attitudes,” though they expect growth to be somewhat slower this year, said Mr. Seiders.

David Berson, chief economist of Fannie Mae, said he expects 2005 to be strong, but not another record-producing year. Mr. Berson is one of a growing number of economists who sees a bubble forming in large urban areas where prices have soared in recent years.

“A combination of ‘buying ahead’ behavior in the past couple of years and a slowdown in the rapid pace of investor demand should reduce home sales by roughly 7.5 percent this year,” he said.

“Moreover, the unsustainably rapid rate of home price appreciation should slow, as well, with gains nationally averaging around 3.5 percent.”

Freddie Mac’s chief economist, Frank Nothaft, said he expects 30-year mortgage rates to rise a half point to more than 6 percent this year. Because of rapidly rising short-term rates, more buyers will opt for hybrid adjustable mortgages that require refinancing in five years, he said.

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