The remodeling industry, spurred the last couple of years by all-time low mortgage interest rates, might need to find a new way to grow in 2004.
According to news reports, the Mortgage Bankers Association is predicting that U.S. mortgage lending will drop precipitously next year, from a record $3.3 trillion in 2003 to $1.6 trillion. This expectation is based on a slight increase in mortgage rates, which should result in fewer refinancing loans. Refinancings, which accounted for roughly two-thirds of mortgage lending in 2003, are expected to make up only 21% of lending by 2005.
Though it's certainly not great news, it's no reason to panic, says Kermit Baker, senior research fellow at the Joint Center for Housing Studies at Harvard University. Indeed, an increase in interest rates indicates a healthier economy, so people are more likely to borrow, despite a higher cost.
Furthermore, there are other factors that should pick up the slack that would result from the predicted decrease in mortgage lending. Most important, the housing industry should be strong again next year. In a recent issue of the NAHB's weekly online newspaper, NAHB chief economist David Seiders cited healthy prices as an indication that the housing market will remain robust well into 2004. Homeownership hit a record level in the third quarter of 2003 -- more than two-thirds of U.S. households own their homes -- a very good sign for a continuing boom in the remodeling industry.
No one is expecting the housing industry to keep pace with its record-setting run in 2003, but the National Association of Realtors (NAR) has forecasted that 2004 will be the second-best year ever. In a press release, NAR chief economist David Lereah pointed to a growing immigrant population and children of baby boomers reaching home-buying age as reasons for his projection. His expectations for other economic indicators were also generally favorable, and the resulting strong economy would be good for remodeling.
In the end, the ultimate impact will probably be that industry growth will level off somewhat. "It's not a gloom-and-doom scenario," Baker says. "We've been experiencing 8% to 10% growth in the past few years. Next year, it might be 5% or 6% instead."