The chief economist of the National Association of Realtors says 2004 will be "very, very healthy" as the economy continues to grow.
By JUDY STARK
Published November 15, 2003
SAN FRANCISCO - Are these the words we've been longing to hear?
"We've awakened to a healthy economy."
So says David Lereah, chief economist for the National Association of Realtors, who gave a cheerfully optimistic forecast last week when 23,000 Realtors and guests gathered in San Francisco for their annual convention.
"The economy will be very, very healthy in 2004," Lereah said. Every sector of the economy "will pick up in a meaningful way."
The housing industry has rightfully taken credit this year for being the only healthy part of a sputtering economy. Interest rates at 40-year lows are expected to drive sales of existing homes to a record 5.99-million and new-home sales to a record 1.05-million.
Lereah (pronounced Le-RAY) spoke minutes after the Labor Department released figures showing an increase of 126,000 nonfarm jobs for October (2.2-million jobs have disappeared in the past 2-1/2 years) and that unemployment dropped 0.1 percentage point, to 6 percent (down from a high of 6.4 percent in June). At the end of October came the good news that the economy grew in the third quarter at a robust 7.2 percent.
Those are all good numbers, and Lereah was smiling as he said "every sector of the economy participated" in the upturn and predicted that "every sector will pick up in a meaningful way" in the days ahead.
The job gains are just the beginning, Lereah said. He expected gains of at least 150,000 jobs a month and an annual growth rate of 3 to 4 percent. This has been a jobless environment because "workers have been too productive," he said, and business doesn't hire "when technology and cost-cutting make you more productive." But now empty shelves are proof of consumer demand, "and business is poised to step up. Business spending will start to take off by the first quarter of 2004. . . . When business builds inventory, we've made it."
The tax-rebate checks last summer "really worked to stimulate buying," Lereah said, hence those empty shelves, and housing "created so much wealth" through price gains and cash-out refinancings, which have pumped $340-billion into the economy.
Since 1991 a number of factors have positioned themselves to create what Lereah called "the Perfect Calm":
* Mortgage rates have been falling, not only spurring sales but virtually creating the refinance market.
* Real estate met the Internet: centralized property listings, faster exchanges of information, low search costs and speedier transactions.
* Real estate became a "safe haven" after Sept. 11, 2001, a better place to invest wealth than the staggering stock market.
* Technology innovations such as credit scoring, automated underwriting and diverse mortgage products decreased the time and cost of obtaining mortgages and opened up the market to more buyers.
* Favorable demographics fueled the market: 78-million baby boomers approaching their peak earning years and an influx of eager immigrant buyers.
Next year is an election year, typically a time when incumbents do everything they can to keep the economy healthy. President Bush is mindful that the poor economy cost his father re-election in 1992. So he will try to avoid repeating that stumble. "And there will be more tax relief in 2004," Lereah said confidently.
Lereah predicts that housing next year "will slow to its second-best year ever, and if I'm wrong, it will go up even further." He expects 5.6-million resales and 960,000 new-home sales next year. You can't sustain a higher pace forever, he said, and the slight increase in mortgage rates that he expects will take some people out of the market. Thirty-year, fixed-rate mortgages will end this year at about 5.9 percent and will drift up slightly next year, to 6.5 percent. One-year adjustables will rise from 3.8 percent to 4.0. Existing-home prices will cool from an increase of 8.8 percent this year to 4.3 percent.
"There is no price bubble. There's no popping sound," he said. The years 2005 through 2007 "should be great for housing."
He issued one caution: "The one critical factor that could hurt and harm housing" is a federal deficit. "If the government has to borrow, it crowds out private borrowing," Lereah said. He said 2005 "could be a rocky year if the deficit is not under control." But that won't happen until after voters make their choice at the polls a year from now.
