In a new report, First Chicago NBD economist Diane C. Swonk observes that the 1990s were supposed to be a "dismal decade" for housing, as sales, construction activity, and home values declined.
It has been been anything but. Low mortgage rates and a booming economy have propelled sales to record levels-and Ms. Swonk predicts more of the same for 1998.
But there is a price to this boom. "There is no such thing as a free lunch," Ms. Swonk writes, "and mortgage defaults are expected to remain structurally high in 1998."
In an interview, Ms. Swonk explained that government and competitive pressures have resulted in banks' extending mortgages to riskier, lower- income populations. That has helped bolster the housing market but will lead to higher defaults this year, she said.
In her report she singles out zero-down mortgages as a "particularly disturbing" sign of the heightened credit risk mortgage lenders have taken on.
Generally, however, Ms. Swonk said, 1998 will be another good year for housing, because the fundamentals of the market continue to be strong.
Consumer confidence continues to hit new highs; real wages have begun to accelerate; equity markets continue to hit new records; mortgage rates remain relatively low; and credit remains exceedingly easy, she said.
Like other analysts, Ms. Swonk said the housing market's gains will be concentrated in the first half of 1998. Mortgage rates are already rising, and the economy as a whole is at higher risk of slowing down in the second half as a result of Asia's problems.
Ms. Swonk predicted that home sales will jump 5%, to a record 5.3 million in 1998. Gains will be broad-based, she says, from entry-level to the high-end market.
Housing starts, particularly of single-family homes, will also rise. The supply of unsold new single-family homes fell below four months in January, the lowest since the early 1970s. Ms. Swonk predicted that overall starts will rise by 3.5% in 1998 and single-family starts will rise by 4.5%.
Home price appreciation will also be strong: 4.4%, in the same ball park as last year's 4.8%.
There are two principal risks to this forecast, Ms. Swonk said.
First, that surprisingly strong economic growth could trigger higher mortgage rates sooner than expected. Rates have already risen since January's lows, in part because of strong industrial production and roaring home sales.
But Ms. Swonk added, "It remains unclear, however, whether an earlier- than-expected turn in mortgage rates would hurt the market this year. Credit remains in ample supply, and for better or worse a rise in interest rates would likely be countered by easy terms."
The second risk to strong housing sales is posed by the stock market. A drastic drop would take a big bite out of high-end home sales, Ms. Swonk noted. "But this probably poses a greater risk to next year's housing market," she added.
In the Midwest housing market, which Ms. Swonk follows especially closely, prospects remain good. Consumer confidence and housing affordability are stronger in the Midwest than in any other region.
But the midwestern market has been expanding for longer than other regions, and its momentum now is slower than the rest of the nation's.
Ms. Swonk predicted that home sales in the region will rise 4.5%, to 1.26 million units in 1998. Housing starts will rise 1.8%, to 310,000 in 1998. Because of the mild winter, most of those gains will occur in the first quarter.
She noted that apartment vacancies in downtown Chicago remain among the nation's lowest-fueling strong new multifamily production. The flow of funds into REITs, which need to diversify out of the overbuilt South, will also contribute to the trend, she said.
Home values are expected to rise 4.9% in the Midwest this year, outpacing the nation's gains.