Economist boosts 2005 home sales target Thursday June 16, 5:54 pm ET By Kristin Roberts
WASHINGTON (Reuters) - U.S. home sales could strike a fifth straight record in 2005 due to low mortgage rates, a growing economy and an increasing number of investors, Fannie Mae's (NYSE:FNM - News) chief economist said on Thursday.
"It's certainly possible that in 2005 we will see a fifth consecutive record year for housing," said David Berson, chief economist at the mortgage finance company. "We're within just a whisper of what a record number would be."
Berson, in his mid-year outlook, boosted his target for sales of existing homes in 2005 to 6.746 million from an earlier estimate of 6.150 million. Sales of new homes should hit 1.199 million, up from Berson's earlier forecast of 1.099 million. The new targets would be just shy of record existing and new home sales last year.
In 2004, existing home sales totaled 6.784 million while new home sales hit 1.200 million.
"At the beginning of the year we did not project home sales to be as strong as they've been," Berson said. "I don't know anybody who predicted home sales would be as strong as they have been. They are running at a record pace."
He also said data due next week should show record levels of existing and new home sales for May.
On Thursday, a U.S. Commerce Department report said groundbreaking for housing rose 0.2 percent in May. That was just shy of expectations but still signaled sector strength.
Stubbornly low long-term mortgage rates and an increasing number of investors putting money into the market have kept the housing sector hot this year, defying economists' predictions six months ago that sales, construction and price appreciation would slow.
So far, that has not happened.
Even though the Federal Reserve has raised its target for short-term interest rates in eight quarter-point steps to 3.0 percent, long-term interest rates have not responded. In fact, average 30-year fixed-rate mortgages remain lower than a year ago, according to finance company Freddie Mac (NYSE:FRE - News).
In addition to low borrowing costs, demographics are supporting demand as the huge post World War 2 generation begins looking at second homes and retirement property while their children shop for their first houses, economists say.
INVESTORS
Investors putting money into housing for financial returns, rather than personal use, are an additional source of demand, and the one posing the greatest risk to a housing market that increasingly has become a source of concern for economists and policy makers.
"Investor demand is more volatile than other demand in the sense that investors can choose to put their money into any investment worldwide," Berson said.
"If they decide that investments in China, or investments in gold or investments in the U.S. stock market are better, that you get a better return, they can redirect funds out of the housing market," he said.
Berson said he had expected investor activity to slow in 2005, but like other housing indicators, it has increased instead. In fact, it has doubled, Berson said.
Some investors are less likely to abandon the housing market, such as people near retirement looking for second homes, Berson said.
Still, there are more investors looking for financial returns than a second property to occupy, according to data from analytics provider LoanPerformance and cited by Fannie Mae.
If investors begin to withdraw from the market, housing activity will slow, Berson said.
He estimated, for example, that a reduction in investor activity could help bring home price appreciation in 2006 down to a range of 3 percent to 3.5 percent from the double-digit rates posted in 2004 and the 7 percent Berson expects this year.
"All you need is some reductions in the growth rate of investor activity to give you fewer home sales next year and lower price gains," he said. "The more investors pull out of the market, the greater the slowdown in home price gains will be."
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