Housing Expected To Flatten Out From Record Levels In 2005 While Jobs And Economy Grow

November 1, 2004

Activity in the nation’s booming housing industry should hold up at fairly robust levels into 2005, according to the consensus of economists participating in the National Association of Home Builders’ (NAHB) Construction Forecast Conference at the National Housing Center in Washington, D.C. The conference, held twice yearly, brings together top experts from across the housing industry to discuss topical issues. Panelists were largely optimistic about prospects for the residential construction industry, economic growth, job growth and inflation as the Federal Reserve continues to gradually push up interest rates and the fiscal stimulus of the Bush Administration’s tax cuts begins to fade. High oil prices were identified as the wildcard in the scenario. While hard to predict, energy costs were expected to subside next year from today’s record levels after taking a small bite out of economic output and consumer confidence in the short term. “The housing market has been nothing short of phenomenal, especially anything that smacks of homeownership,” said NAHB Chief Economist David Seiders. But the nation’s housing market is in the process of “reaching its limits” and “topping out.” With activity “flattening in 2005,” Seiders is forecasting a decline in housing starts next year of about 4.2% to 1.85 million units, down from the 1.935 million starts projected for this year. Sales of new single-family homes are forecast to drop 5.2% from a record of more than 1.16 million this year to about 1.1 million. Single-family production is poised to set another record this year, Seiders said, and the fundamentals of the market will remain good in 2005 even though some households may have moved up their home-buying plans from next year to this year when they saw mortgage interest rates starting to rise. With inventories lean and demand continuing to ride high, the single-family market “hasn’t sewn the seeds of its own destruction,” he said. Multifamily production continues at an annual pace in the 340,000-unit range, he said, even though demand in this sector has been softened by the allure of homeownership for renter households. Rental vacancies were down a bit in the third quarter, he noted, but remained near record levels, and condominiums have been on an upswing. With the tremendous rise of home equity, which is approaching $9 trillion, Seiders said that home owner expenditures for additions and alterations should keep the residential remodeling industry growing next year. Annual volume is currently in the $220-$225 billion range. Looking at household formations and immigration growth, he gauged demand for single-family and multifamily housing at an annual average of 1.8 million units through 2013. Maury Harris, managing director and chief economist for the Americas for UBS Warburg Research said that the economy has now built up a head of steam from the fiscal and monetary policies that were used to rally businesses from the technology sector crash, 9/11, corporate scandals and the invasion of Iraq.

“The U.S. economy usually doesn’t need that much help in the first place,” and can run on its own “once the ball gets rolling,” Harris said. With better job and income formation and consumer spending coming into play, he said there is currently “a transition from a policy-driven economy to an economy that’s getting back to its old self; it’s on its own again.” Growth in the Gross Domestic Product will decline from about 4.3% this year to 3.2% next year, he said, which will be good enough to stabilize the unemployment rate around 5.2%-5.3%. With the effects of strong worker productivity gains in recent years fading, he forecast that monthly payroll growth would average 150,000-175,000 during the year ahead. Following disappointing job growth in September related to hurricanes in the Southeast, he predicted that the Labor Department will report the creation of 225,000 new jobs in October when it announces its workforce statistics on the Friday following the elections. Harris noted that low-wage jobs had been growing faster than jobs paying better than average until this summer, when the two started growing at about the same pace, and that the hemorrhaging of high-paying manufacturing jobs to overseas has stopped, which he called “a step in the right direction.” He said that about 1.5 million jobs had been outsourced over the past four years, but the savings from that outsourcing had actually contributed to business growth and that 60%-75% of companies eliminating jobs in some areas were simultaneously adding new ones in others. One way or the other, Harris said that oil prices would retreat next year, getting back down to about $35 a barrel: either supply constraints will ease or prices will continue at a lofty level until they discourage demand. Along with his co-panelists, Michael Moran, chief economist of Daiwa Securities America, said that long-term interest rates will be heading up next year as the Fed continues to boost the federal funds rate. That rate will be 2% at the end of this year and 3.25% at the end of 2005, he said; Harris predicted it would be 4% by the end of next year and Seiders forecast it would be 3.75%. Moran said that keeping stimulative monetary policy in place would have created “genuine inflation problems” in a year or two, and in aiming for neutrality the Fed will want a real federal funds interest rate of 2.5%-3.5%, which would be a nominal rate of 4.5% at today’s rate of inflation. “It does not need to get there quickly,” he said, but the Fed can’t allow the rate to sit at its current 1.75%. Rising interest rates shouldn’t put much of a squeeze on consumers, he said, because “most of the debt of the household sector is fixed-rate so you don’t see it rolling into higher interest rates as the Fed tightens.” Households remain in fairly decent financial shape, Moran indicated, despite current high levels of their debt payment burden. Current readings of those statistics are not comparable to historic readings, he said, because the homeownership rate is higher, people increasingly use credit for convenience so they don’t need to carry cash and lenders are technologically better able to make loans. Reaching a similar conclusion on household debt, Harris noted that “we have become a more prosperous economy,” with steady improvements over time in real incomes and the standard of living that are associated with spending a smaller fraction of income on necessities, enabling households to qualify for more borrowing. Consumer delinquency rates have not gone up, the panelists noted.

Source: NAHB

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