Housing Market Expected to Slow

Oct. 17 -- Housing, which has been a veritable cornerstone of the U.S. economy, is starting to show some cracks.

With the events of Sept. 11 tipping an already fragile economy into recession territory, many market watchers are now expecting the U.S. housing market to slow through the end of this year and into 2002.

Although many consumers are taking advantage of the lowest mortgage rates the United States has seen in more than 30 years, concerns about the economic slowdown and job security are expected to keep some sidelined when it comes to buying a house over the next few months.

"Housing is in better shape than the rest of the economy," says David Lereah, chief economist at the National Association of Realtors. "However, if the rest of the economy is in a recession and that recession deepens, that more than offsets the favorable impact of lower rates."

Refinancing on Fire

One side effect of lower rates is that mortgage refinancing is expected to boom. Almost 75 percent of mortgage applications for the week of Oct. 5 were due to mortgage refinancing, according to the Mortgage Bankers Association. Mortgage lender Freddie Mac expects 2001 to see a record $1.7 trillion in mortgage originations, with refinancing expected to make up about 54 percent of that activity.

"The problems with refinancings is that people are actually refinancing and not taking money out of their house to re-spend," says Lereah. "They're using it to reduce debts, which is good for them but not good for the economy."

It also signals an unwillingness to buy new property, which is reflected in some recent forecasts. Despite September's stronger-than-expected housing starts, which rose 1.7 percent, economists at Freddie Mac expect housing starts, or new residential construction, to decline in the fourth quarter, with a resurgence in starts by mid-year 2002.

The lender also expects existing home sales to decline in the fourth quarter, with housing prices rising by around 2 percent nationally for the next few quarters, compared to increases of prices at an average of 8.1 percent during the first half of the year.