Housing sales, both for existing homes and new homes, have set records for the past three years, despite predictions by economists that the housing market could not continue expanding and that home prices would slow. Will 2004 be the year the forecast will be on the money?

"For most parts of the country the housing markets should remain relatively strong, but below the sales pace set during the last three years," said Dr. Leonard Zumpano, professor finance and director of the Alabama Real Estate Research and Education Center at The University of Alabama.

"In locations where home price appreciation has far outpaced the growth in household income, we expect to see the markets soften somewhat, especially if mortgage rates increase. Families who have been the beneficiaries of double and triple digit price appreciation might consider cashing in their chips, taking their profits and moving South or to the Midwest," he added.

For 2004 most economists are predicting a slowdown for the housing market. "Part of the reason for this prediction is the expectation that the growing federal budget deficit, in conjunction with an improving economy, will put upward pressure on mortgage interest rates, which have remained in the 5 to 6 percent range during 2003," Zumpano said. "Even if this scenario plays out, mortgage rates will probably not rise above 7 percent next year, given the Federal Reserve's commitment to an expansionary monetary policy. This may help to blunt the reduction in housing affordability resulting from strong housing price appreciation in some parts of the country; that's where we see the problem in 2004."

According to Zumpano, the bigger affordability concern for housing in 2004 is the fact that home prices are rising much faster than household income in many parts of the country, especially on the east and west coasts. In the New York metro areas median home prices rose almost 60 percent between 1998 and 2003; in Boston they rose almost 70 percent during the same period, while in San Diego they rose by a staggering 78 percent.

"As a consequence, fewer and fewer households can afford homes in these locations and those that can find that their resources are being stretched to the limit, with two wage earner households at risk should one spouse lose their job," Zumpano said. "Obviously, housing price appreciation at these levels cannot be sustained."

In other parts of the country, such as Alabama, housing price appreciation has been more modest. For example in Birmingham, existing home prices rose by 22.3 percent between 1998 and 2003, a 4.46 percent increase per year. Similar rates of appreciation were reported in Anniston and Gadsden while Tuscaloosa and Mobile home prices have been rising at a rate of 3.6 percent per year.

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