Housing Market in 2005 Should be Good, but will Not Rival Predicted Record-Setting 2004

A 2005 economy strong enough to keep housing prices firm, tempered by the potential impact of the growing federal deficit will combine for a good housing market, but not one as strong as 2004, predicts a real estate expert at The University of Alabama.

“Look for a good, but not record setting, housing market next year,” says Dr. Leonard Zumpano, director of the Alabama Real Estate Research and Education Center at The University of Alabama.

“Even if the housing market slows during the last two months of the year, 2004 will probably still set another record for existing home sales,” Zumpano said. “A reasonably strong and expanding economy along with rising employment will work to keep housing prices firm in the New Year,” he said.

“However, the real question is how long the bond market will continue to tolerate the fast growing federal budget deficit. If President Bush is successful in making his tax cuts permanent, a quick or substantial reduction in the deficit becomes increasingly unlikely in the near term.

“Add to this, concern over the growing foreign trade deficit and continuing downward pressure on the dollar. If foreign governments, the principal buyers of U.S. government securities, lose confidence in America’s fiscal situation, there could be a capital flight out of the U.S. putting upward pressure on interest rates.

“If this scenario plays out, we can look forward to higher mortgage rates next year and further deterioration in housing affordability. This will, in turn, reduce consumer demand for housing during 2005.”