The combination of rising interest rates and continued tightening by the Federal Reserve will help curb the growth of the housing market in 2000 from its record-breaking year in 1999, according to a panel of economists surveyed by the Bond Market Association.
The committee, which released its predictions in mid-December, was unanimous in making the decision on monetary policy, said committee co-chairman William Brown of J.P. Morgan & Co., adding that, "Nothing terrible is about to happen."
The association is predicting that interest rates on a 30-year mortgage will climb gradually throughout the course of the year, to about 7.95% by June, and advance to 8.05% by December. Current rates have recently jumped to 8%.
Committee co-chairman William Dudley, of Goldman, Sachs & Co., noted that current interest rates have surged 100 basis points over the course of 1999, which will lead to a plateau in the housing market.
He added that there will not be "a precipitous decline in housing," but that it will be "flat to down." He credits this almost solely to the rising interest rates.
The committee is predicting new home sales to hold steady at 900,000 units in 2000, while existing home sales will decline to 4.8 million units in 2000 from 5.2 million units in 1999.
Brown said that an economic slowdown will occur in 2000, but it will be "modest and gradual."
The committee believes that the Fed will raise interest rates twice in 2000, with a 25-basis-point hike in the first half of the year, most likely at the March Federal Open Market Committee meeting.
Another 25-basis-point hike will occur in the second half of the year. The tightening will be the "one restraining inflation on the economy," he said. "There is some Y2K effect in the numbers."
Dudley added that many people felt that the Fed should have moved faster to raise rates in 1999, but the economy remains strong enough to keep unemployment at its current levels.
However, he noted, "The Fed isn't going to tighten aggressively enough to be restrictive" to the economy.