New-Home Boom: Demographics Bode Well for New-Home Demand. New Immigrants and Aging Boomers Are Pacing a Red-Hot Market. Affordability Problems and Higher Rates Are the Wild Cards in the Future

By Milligan, Jack | Mortgage Banking, January 2004 | Go to article overview

New-Home Boom: Demographics Bode Well for New-Home Demand. New Immigrants and Aging Boomers Are Pacing a Red-Hot Market. Affordability Problems and Higher Rates Are the Wild Cards in the Future


Milligan, Jack, Mortgage Banking


Give me your tired, your poor, your huddled masses yearning to breathe free .... --PARTIAL INSCRIPTION ON THE STATUE OF LIBERTY

THESE ARE THE BEST OF TIMES FOR HOME builders around the country--and for the mortgage industry, which is desperately seeking The Next Big Thing as the refinance boom quickly dissipates in the face of rising interest rates. Although some housing economists and mortgage originators are forecasting a slight decline in new-home sales in 2004, the market should continue to perform strongly for the next couple of years. According to the Mortgage Bankers Association's (MBA's) forecast, the decline will be roughly 126,000 fewer new-home sales in 2004.

"I'm optimistic about the future of home-building in our country overall," says Jack L. Haynes, an executive vice president in the National Builder Division at Countrywide Home Loans Inc., a subsidiary of Countrywide Financial Corporation, Calabasas, California, one of the nation's largest mortgage lenders.

But there's also something about this fulsome market that's more than a little perplexing to housing experts: They're not exactly certain why the market is performing so well, because by at least one traditional metric, it probably shouldn't be. Job growth is normally the primary driver of new-home sales, but with the U.S. economy still recovering strength after a brief but traumatic recession a few years ago, job growth was tepid through the better part of 2003. Yet in early December the market was poised to set a record for new-home sales.

So while home builders and mortgage lenders are counting their blessings, they'd still like to understand the market a little better.

Two demographic forces may be at the bottom of the new-home phenomenon. One is the continued spending of baby boomers, whose profligacy is an important market dynamic. The other factor is actually an old story in this country: immigration. That first sentence in the inscription on Lady Liberty rings as true today as it did when President Grover Cleve-land dedicated the statue in 1886.

Immigrants haven't passed through nearby Ellis Island since 1954--and today they're more likely to come from Mexico or Asia than Europe--but the inflow of people to the United States is helping to drive both the national economy and the housing market.

Make no mistake about it--the market for new single-family homes is sizzling. Last November, the National Association of Home Builders (NAHB), Washington, D.C., was forecasting that 2003 would be a record year for new-home sales, eclipsing the previous record set in 2002. Even a slight slowdown in new-home sales last October did little to slow the market's momentum.

Officially, NAHB was projecting sales of 1.083 million, an impressive 11 percent gain over 2002's strong performance. The only region to see a decrease in building permits for single-family units through October 2003, compared with the prior year period, was the North-east, where permits dropped 3 percent. The West led the nation with a 13 percent increase, followed by the South at 10 percent and the Midwest at 9 percent.

NAHB Chief Economist David Seiders is forecasting a 6 percent decline in newhome sales in 2004--to 1.016 million--in anticipation of "somewhat" higher interest rates.

But even that forecast is good news to mortgage lenders, who are bracing themselves for a steep decline in refinancings next year--particularly if mortgage rates continue inching upward. David Berson, Fannie Mae's chief economist, expects refi volume to hit $2.45 trillion in 2003--but to plummet to just $600 billion in 2004. "That's a huge drop," says Berson.

Job growth traditionally has driven new-home sales more than any other factor. It only makes sense that people are more likely to buy homes when the employment market is strong and consumer confidence is running high. But that certainly hasn't been the case through this bull housing market--at least when it comes to job growth. …

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