Housing Remains Firm In The Midst Of Economic Uncertainties, Economists Say

November 1, 2002

Spurred by the lowest mortgage interest rates since the 1960s, the housing sector will continue to bolster the economy into next year, although the path to recovery is expected to be somewhat rocky due to uncertainty over war with Iraq, stock market volatility and weak consumer and business confidence, economists said yesterday at the National Association of Home Builders' (NAHB's) 65th Semiannual Construction Forecast Conference.

"The key shock absorber in the economy is excellent mortgage rates that have averaged around 6 percent. We look for rates to gradually edge up to 6.5 percent by the end of next year, which is not that big a deal," said David Seiders, NAHB chief economist.

Seiders marveled that the single-family housing market is in an "incredible situation, with record new home sales (953,000) and starts (1.34 million) expected this year. And next year's forecast is also very positive. Demand is good, inventory is well-balanced and we're looking for a minor tapering off" to 1.3 million single-family starts.

On the multifamily front, Seiders said that starts and permits are "holding up well," though he expressed concern over falling absorption rates, rising vacancies, and some household migration to single-family homes. Multifamily starts are anticipated to hit 350,000 in 2002, up 6 percent from last year.

NAHB is projecting overall housing starts to rise 5.3 percent this year to 1.69 million units and then decline 3.4 percent to 1.63 million units in 2003.

"Housing has been one of the stellar areas of the economy," added Maury Harris, chief U.S. economist for UBS Warburg Research. Like Seiders, he predicted that starts would reach 1.69 million in 2002, followed by a modest reduction to 1.58 million next year, which is still quite strong by historical standards.

While panelists concurred that the chance of a double-dip recession was unlikely, they agreed that the economy remains vulnerable on several fronts. Seiders cited several "shocks" that have prevented a smooth acceleration out of the recession of 2001, including "Enronitis" that sparked a crisis in confidence in U.S. corporations, the West Coast dock strike, fear of a looming war with Iraq and a widening trade deficit brought about by a strong dollar and weak global economy.

"There are still a few bumps in the road," acknowledged Michael Moran, chief economist of Daiwa Securities America Inc. "There are signs of a renewed downturn in the economy. Industrial production has been down for two consecutive months, and auto and retail sales are slowing."

Despite these factors, Moran remains upbeat about the economy. "Inventories are at a comfortable level, and the rate of inventory to sales is good. Consumer spending will remain positive and generally steady. I don't see the household sector retrenching. And business investment will hold steady," he said.

"One of the best signals that the economy is improving is that we are continuing to see solid productivity gains," said Harris. Patent grants that show productivity and research and development are at an all-time high."

However, Harris noted that in the aftermath of a recession, economic activity is usually robust, with Gross Domestic Product typically expanding at about a 5 percent annual clip. He sees GDP rising at a tepid 2.9 percent rate this year and 3.5 percent in 2003.

And with the Conference Board reporting this week that consumer confidence is now running at its lowest level since November 1993, analysts were split on whether the Federal Reserve will move to cut short-term interest rates -- already at 40-year lows -- when it meets on Nov. 7.

Inflation is a non-factor and running at just over 2 percent annually, leaving the Fed with a free hand to act. However, with the federal funds rate already at a record low 1.75 percent, Seiders said the real question is "does the Fed want to hold its ammo?" He said there was a 51 percent chance that the Fed will hold steady next week, while Moran countered there was a 55 percent probability that the central bank would ease rates by a quarter point.

Turning to the topic of home prices, a subject that has garnered intense media attention in recent months, economists were unanimous in their assessment that there are no signs of a house-price bubble on the horizon.

Putting the issue to rest was the aim of chief economists from the nation's two mortgage powerhouses. Fannie Mae's David Berson and Freddie Mac's Frank Nothaft each came to the same conclusion. "The simple answer to the question, ‘is there a housing market bubble?' is, no," said Berson. "In fact, price gains could go higher if constraints on new construction continue to intensify over the next decade."

Both economists allowed that certain local markets could see some slippage, but their overall consensus was that no big crash is likely. "Local economic conditions dictate house-price declines, like when a company lays off a thousand workers. But housing just isn't prone to a bubble effect, which is more likely among stocks and other assets whose values may be driven by expectations of large, short-term gains," Nothaft noted. "While we'll see some decline in house-price growth in coming months, given the good interest-rate picture and lean inventories of homes for sale, no drop in national house prices is imminent."

As for the international economic perspective, Nariman Behravesh, chief economist of Global Insight (formerly DRI-WEFA), says that because the U.S. is currently the lone locomotive in the global economy, overseas demand for U.S. exports will remain sluggish next year. Further hampering U.S. exports is the reluctance of foreign central banks to drop their interest rates, which is putting more pressure on the Fed to cut rates in the U.S. The worldwide economy was in recession during the past two years, but led by the strengthening U.S. recovery, is expected to post modest growth next year and in 2004.

In another conference presentation on remodeling market activity, two new non-government studies are beginning to clear the fog of uncertainty from this sector that accounts for almost 40 percent of all housing-related expenditures. Kermit Baker, of Harvard's Joint Center for Housing Studies, commented on early findings of his organization's new "Remodeling Futures Program," a study based on tabulations of the 2001 American Housing Survey. NAHB research economist Gopal Ahluwalia reported on NAHB's Remodeling Market Index (RMI), a new confidence gauge for professional remodelers. Based on both surveys, the outlook is very reassuring.

"Equity conversion and mortgage refinancings have certainly made remodeling an attractive prospect," said Baker. And while over half of home improvements are by "do-it-yourselfers" on their own homes, that still leaves half of a very big marketplace to professionals. Of the total $214 billion spent on remodeling last year, 77 percent (more than $131 billion) was on home owner improvements, with the remainder split among rental maintenance and repairs ($22.9 billion), rental improvements ($25.3 billion) and home owner financed maintenance and repairs ($34.3 billion).

Looking at the biggest chunk of the remodeling market – expenditures by home owners – most of the growth is occurring at the highest end, specifically projects amounting to more than $20,000. Kitchens and bathrooms are among the most popular individual projects – which explains why about 60 percent of remodelers focus on kitchens, bathrooms and room additions, Ahluwalia noted.

Top concerns of professional remodelers at this time include availability of skilled labor, labor costs and employee retention. But overall, said Baker, "We continue to be optimistic. The remodeling market has performed well and we think it will continue upward expansion into the next several years. The numbers should continue to show slow, stable improvement along with strong sales of existing homes."

Source: National Association of Home Builders

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