With mortgage rates having risen off their four-decade lows and home sales thought to have peaked, the housing market may be at a crossroads.

David Berson, chief economist and vice president of mortgage giant Fannie Mae, came to Dallas recently to say he’s in the optimists’ camp. Berson says housing sales will slow a little over the next year, but that will only mean that 2004 will be the second-strongest year ever.

Dismissing the notion of a housing bubble, he says the market is set to grow at a healthy pace for the next 10 to 20 years, driven by the housing needs of the aging baby boomer population as well as new immigrants.

“The housing market should grow over time because you’re going to have more households,” he said during an interview with Dallas Morning News reporters and editors last week. “The demographics and the stronger economy would offset the rise in rates.”

The only danger, he said, would be from an ultrafast rise in 30-year fixed rates – say, to 8.75 percent, which was around the highest rate in recent years. But for now that’s only a theoretical fear. The average 30-year fixed rate is 5.6 percent.

Fannie Mae, aka the Federal National Mortgage Association, is a government-chartered company that provides capital to the housing market by buying and selling mortgages. It operates much like Freddie Mac, the government-chartered Federal Home Loan Mortgage Corp.

In the interview, Berson also touched upon other aspects of the housing market, from default forecasts to the changes in the lending landscape. Here are a few excerpts:

Q The forecasts for the last few years that have called for moderating home sales have all been wrong. Is there a chance that people will just keep charging ahead next year?

A. Absolutely. Our forecasts have been near the top, and we’ve been too low. So if you go on the history of home sales in the last three years, we’re going to be wrong again and home sales will hit another record next year. I think the risks are that home sales will be stronger than expected in 2004 rather than weaker.

The miss in the home sales came about primarily because of the miss in interest rates. Nobody got the interest rate declines correct, and if they did get the interest rate declines, they assumed it would be because the U.S. would fall into a deep recession. Nobody got the combination of modest growth and record low interest rates – because it is something that we’ve never really seen.

QIs that healthy, though – everybody thought the Nasdaq would not go up as much as it did.

A. You don’t live in your stock account, you live in a house. Homeownership rates today are 68.4 percent, a record high. Probably most of the people who bought homes in recent years – particularly those who were renting before – will see an increase in their lifetime wealth because they bought that home. Only about 50 percent of households own equities, so the bulk of household wealth comes with homeownership – which suggests that future wealth will be greater for those households than if they continue to rent.

QWould you say that there’s a housing bubble?

A. I would say there’s not a housing bubble. A bubble’s a market where prices have gone up, not because of economic fundamentals, but because of speculation. We’ve seen that in housing markets before.

Q Could you comment on the changes in lending standards? There was a time when consumers made a 20 percent down payment and never paid more than 28 percent of their gross income on a mortgage debt. But the old rules have changed, and some critics suggest that it has created a situation where consumers often qualify for more than what they can afford.

A. The proof is in the pudding, and that is what’s happening with the actual credit quality of those loans. Delinquencies and defaults are up. There’s no question about it but we had a recession. But if you look at the conventional, conforming market – the part of the market that Fannie and Freddie are operating in – delinquencies and defaults are still historically low.

Where have delinquencies and defaults gone up? They have gone up sharply in government lending, and they have gone up sharply in subprime lending. I would say that things are happening in those markets with underwriting decisions that are not optimal. I don’t know what those things are, but simply looking at the results, lending decisions are made and credit is being extended in those markets that perhaps should not be.

Q What is your forecast for defaults, delinquencies and foreclosures in the coming year?

A. They should go down. If we look at serious delinquencies – payments that are late by 90 days or more – they tend to follow the job market pretty well, peaking somewhere around 12 months after the job market troughs.

The job market probably troughed three to six months ago, which suggests that serious delinquencies might edge up a little higher in the next couple of quarters. We are close to the peak, but we may not see it for another six months or so. Then it will start to slowly go down, and then it will go down more quickly.

Q. What do you expect in the housing market as a result of the demographic shifts that are coming with the aging of the baby boomers?

A. At the end of the decade, the oldest baby boomer will be 64. Homeownership rates for boomers won’t peak until age 69, which means that for the next 10 to 20 years, homeownership rates will increase because of the baby boomers. First-time demand will also be augmented over the next 10 to 15 years by recent immigrants. Homeownership rates start out fairly low for immigrants, but after about 15 to 20 years of living in the U.S., the rates are equal to the national average. A lot of first-time home buying this decade and the next decade will come from the 1990s immigrants.

But at some point, the baby boomers will stop buying all the first homes they are going to buy and all the second homes they are going to buy – which by itself would suggest a significant decline in home-buying activity. But if you look at demographics and the likely immigration growth and the growing number of households with echo boomers, they should just about equal the decline in the housing coming from the baby boomers. In terms of total numbers, the housing market should continue to grow at least for the next 10 to 20 years for demographic reasons.

—

(c) 2003, The Dallas Morning News.

Visit The Dallas Morning News on the World Wide Web at http://www.dallasnews.com/

Distributed by Knight Ridder/Tribune Information Services.

AP-NY-11-24-03 1844EST