Housing market recedes but remains healthy

At a forecasting conference held by the National Association of Home Builders the first week of May, economists said that the housing market should stay healthy, even as it recedes from peak levels.

Matt Morrow, executive officer of the Home Builders Association of Greater Springfield, expects that the local housing industry will remain steady.

“We probably outperform the national market a little bit here, because we have a couple of things going for us that the broader market doesn’t necessarily have going for it,” Morrow said.

Positive factors affecting the local housing market include a reasonable cost of living, the environment and proximity to larger cities and rural areas.

“Schools are typically considered very strong here,” Morrow said. “There are just a lot of attractive reasons about moving to this area (that) tend to draw people here.”

According to an NAHB news release, the national housing market will be driven by ongoing population growth and household formations, an expanding market for second homes and the need to replace aging units.

Increased interest rates

Further growth in the nation’s job force and rising incomes should help offset the negative impact of higher mortgage rates, which are still expected to be at affordable levels by historic standards.

For builders, Morrow said, remodeling will be a key factor in dealing with interest rate hikes.

“Usually the remodeling market and the new construction market ebb and flow opposite each other,” Morrow said. “What has been a little bit unusual here, probably over the last three or four years or so, is that both locally have been very strong at the same time.”

Interest rate increases will depend on how aggressively the Fed pushes up rates, and that pressure will vary depending on inflation. According to the release, economists at the conference noted that although inflation has moved to the upward range of what the Fed considers acceptable, prices remain under control.

NAHB Chief Economist David Seiders projects a 4 percent federal funds rate at the end of this year, with another one-quarter percentage point increase in 2006, the release said. This would move up the prime rate from its current 6 percent to about 7 percent at the end of 2005 and 7.25 percent at the end of next year.

Although it is possible that 30-year fixed rates won’t quite reach the 6.4 percent average that NAHB economists were forecasting for this year’s fourth quarter, the pressures on those rates “have to be up going ahead,” Seiders said.

Morrow said that higher interest rates will affect housing prices, but even so, homes should be affordable.

“We’re so spoiled,” Morrow said. “If you’re deciding ‘no’ on a house because it’s at 6.5 (percent), you’re definitely spoiled. That’s still very cheap money.”

However, Morrow added, if higher interest rates converge with other factors that boost housing prices – particularly those that aren’t market-based – it could spell trouble for the local housing industry.

“If the price of lumber goes up, that makes houses harder to afford, too. But at the very least, the value of lumber is more, so that lumber that’s in your house, even though you paid more for it, in theory, you can sell that lumber for as much as you paid for it,” Morrow said. “That’s supply and demand working on the goods that go into the house, so it’s legitimate market-based value that you get.”

But when housing costs rise as the result of fees – such as the $1,500 sewer connection fee approved May 2 in Ozark, “there’s nothing you can point to in that house (and say) here’s the value in it for you,” Morrow said.

He noted that the local housing industry is at a critical point.

“We did just have a year when the average price of a home went up 12 and a half percent, and incomes did what they typically do, with an about 2 (percent) to 3 percent increase. We’re not in a crisis, and we sure would like never to go into one, but we need to be aware of those dynamics and be very careful, ” he said.

One unanswered question at the forecast conference pertained to the state of the nation’s job market. “There are deep uncertainties about the issue of slack in the labor market,” Seiders noted, and that’s a big reason the Fed has been moving so cautiously as it tightens monetary policy.

Unemployment

Nationally, unemployment fell to 5.3 percent in the first quarter. Seiders predicts it will continue downward to about 5.1 percent in 2006, which may be as low as it can go without generating some inflation, he said.

According to the latest figures from the Department of Economic Develoment, Unemployment in the Springfield metropolitan statistical area was 5 percent in March, up from 4.8 percent in March 2004.

In Greene County, March unemployment was 4.9 percent, up from 4.6 percent for the same period in 2004.