Strong Housing Market Expected to Trend Down

WASHINGTON – While the housing industry has helped lead the economy out of recession and to exceptionally strong gains in this year's first quarter, both housing and the economy are expected to quickly drift down to sustainable growth levels throughout the year, leaving the manufacturing sector and others to carry forward the economic recovery and become key engines of growth, economists said at the National Association of Home Builders (NAHB) 64th Semiannual Construction Forecast Conference, held April 25 at the National Housing Center in Washington, D.C.
 
"We're talking about 5 percent plus Gross Domestic Product growth in the first quarter,” said NAHB Chief Economist David Seiders. “Aided by extraordinarily good weather and low interest rates on home mortgages, housing was a star performer, averaging more than 1.7 million starts on an annualized basis."
 
However, this high rate of housing production and economic growth is clearly unsustainable, Seiders added. "Because housing fared so well during the recession, there is no additional pent-up demand to lead the economy forward,” he said. “Oil prices could become a problem, and the tax cuts have already provided a boost to the economy. We're looking to the manufacturing sector to fuel the expansion in the year ahead, and look for GDP to drop back to the 3.5 percent range in the next few quarters."

Beginning in August, Seiders expects the Federal Reserve to gradually begin tightening monetary policy, and says that mortgage interest rates are expected to modestly rise from their current 7 percent range up to 7.8 percent by the end of 2003.
 
On the housing front, supply and demand seem to be well-balanced, Seiders noted, with NAHB projecting overall housing starts to rise 1.7 percent this year to 1.64 million units, and then decline 2.9 percent to 1.59 million units in 2003.
 
On the single-family side, Seiders estimates a 2.4 percent gain this year to 1.31 million units, followed by a 3.6 percent reduction to 1.26 million units next year. Multi-family starts are expected to remain stable, down less than 1 percent at 329,000 units this year and virtually unchanged at 330,000 units in 2003.
 
As for recent reports of a "bubble" in home prices, Seiders said these are clearly unsubstantiated. "We just don't see an impending bust in housing production or house prices – the demographics are good, inflation is in check, interest rates are under control and the economy is building in the U.S. and abroad,” he maintained. “Simply put, our analysis suggests that this is a non-issue."
 
Seiders' fellow economic analysts, David Wyss, chief economist of Standard & Poor's, and Joel Prakken, chairman of Macroeconomic Advisers, largely concurred with his forecast.
 
"Government  spending is boosting the economy and consumer spending has bounced back, helped by tax cuts, but business investment will have to carry the load the rest of the year," Wyss said, who added that the recent rise in oil prices to $26.50 a barrel is not a concern, and is actually in the "normal" range for energy prices.
 
Wyss said that housing starts and home sales will both fall next year, but still remain at relatively high levels, and he added that housing is the most affordable it has been since the early 1970s.
 
"On a national basis, there are no signs of a housing bubble," Wyss said. "There is no sign that home prices are out of line with household incomes. Because of the high level of affordability, more Americans are buying homes. At today's mortgage rates, it's cheaper for most Americans to own a home than to rent. There could be local bubbles, perhaps in San Francisco, New York or Boston. But housing looks less overvalued than other assets."
 
Prakken, who said that the key to pushing the recovery forward lies in business spending, predicted that by the middle of next year, "capital spending will be going at double-digit rates."
 
However, as capital spending recovers, he said this will push up interest rates and reallocate resources from housing to business spending.
 
"This last recession was the only one where housing contributed positive growth to GDP," said Prakken. "Since there is now no pent-up household demand, housing will be relatively weak in recovery. While this translates into less growth, housing will still remain at a healthy level."
 
In another conference presentation on the apartment sector, Hartrey Advisors economist Jack Goodman described the most recent decade as a "golden age" for multifamily construction – golden because developers "have been building exactly the right amount of product. There's been no overbuilding, and no collapse," he stated. But Goodman notes that in recent months, vacancy rates have begun to rise, and absorption has fallen. He pointed to low mortgage rates and the resulting upturn in single-family housing, as well as cutbacks in job growth as possible causes, but predicted that new household formation will bring stability in the near term, and growth "at the top end of the market" later this year.
 
In a discussion of "What Renters Want," a survey completed by the NAHB Economics Group early this year, staff vice president for research Gopal Ahluwalia noted that "the things that are most important to renters are exactly the things that home buyers consider most important: cost, location, and neighborhood." And, while 46 percent of renters report that they plan to buy, another question showed that 46 percent think apartment living suits their lifestyle. Older people and singles are more satisfied in apartments, while couples, especially those with children, tend to want to own homes.
 
Turning to building materials, builders received good news on the supply and pricing front. Lumber, gypsum, cement, steel and insulation are expected to be in ample supply and priced at relatively stable levels throughout the year, according to John Mothersole, a senior member at DRI-WEFA.
 
ABOUT NAHB: The National Association of Home Builders is a Washington-based trade association representing more than 205,000 members involved in home building, remodeling, multifamily construction, property management, subcontracting, design, housing finance, building product manufacturing and other aspects of residential and light commercial construction.