Housing Market Expected to Slow

Oct. 17, 2001 -- 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.

Housing prices rising more or less at the rate of inflation signals a dramatic change in a market that has seen double-digit price growth in some regions, notes Freddie Mac's deputy chief economist Frank Nothaft.

"How financially secure people feel and what they think their likelihood of keeping their jobs in six months, 12 months, those types of measures help to determine whether people will defer expenses like houses," says Nothaft.

Signs of Slowing

Some realtors say they're already seeing some signs of the market's softening. While many are not quite ready to call it a slowdown in the housing market, some admit that the scales of commerce are tipping more in favor of the buyer.

"Sellers are a little more flexible, given the circumstances," notes Richard Goihman of the Goihman Group, a realtor dealing in luxury properties in Miami and South Florida. "Deals are being made a little easier. Before they sometimes were getting more than their asking price and getting into bidding wars."

Others are more bullish. Gary Malin, chief operating officer of New York City-based real estate firm CitiHabitats, says he's seen prices holding firm and continued interest from buyers for New York City real estate.

"The people that we have sales in line for, nobody has backed out and the renters are still coming," says Malin. "I don't see that there's this mass migration. People still love the city and they want everything it has to offer."

But like many other market watchers, Malin concedes that it's probably too soon to tell what effect the events of Sept. 11 will have on the real estate market longer term. National Association of Realtors' Lereah says he doesn't expect the slowdown to take hold until November or December of this year.

"You might have a couple months of uneasiness," notes Malin.