Nation's Strong Housing Market Seen 'Simmering Down' In 2006

December 22, 2005

Following strong growth over the past three years, home sales and housing production will ease back next year to around 2004’s historically healthy levels, according to economists participating in a teleconference hosted by the National Association of Home Builders (NAHB) yesterday. Striking an overall positive tone, NAHB Chief Economist David Seiders and JP Morgan Chase Senior Economist James Glassman were largely in agreement in their forecasts for the coming year in terms of the outlook for housing and the overall economy. “We’re looking for a good economy through 2006, with GDP growth remaining strong and with job creation running at roughly the same pace as in 2005 – key positive factors in the housing outlook,” said NAHB’s Seiders. “For housing, it will be a systematic simmering down process toward more sustainable levels of sales, production and price appreciation as opposed to a full-blown cyclical contraction. In terms of single-family sales and starts, we’ll basically be retracing the increases we saw in 2005, heading back to 2004’s very healthy levels.” Seiders’ forecast envisions overall housing starts reaching 1.94 million units in 2006, which is down from an estimated 2.06 million units this year and very close to 2004’s 1.95 million units. Single-family starts will decline to 1.59 million next year from this year’s 1.71 million units, while sales of new single-family homes will ease to about 1.19 million units from this year’s record-breaking 1.27 million. Likewise, multifamily starts will slip to 350,000 in 2006 from about 354,000 in 2005. “Multifamily is doing well, with the condo share of the market up to about 50 percent at this point,” Seiders noted. “We think multifamily starts will be pretty stable, with condos losing some market share in the year ahead and the rental side regaining some ground.” Meanwhile, manufactured or “HUD-code” homes can be expected to see a temporary surge, due in part to orders for affordable housing in areas hit by the 2005 hurricanes. “The remodeling sector in NAHB’s forecast is also showing persistent positive growth during 2006, partly reflecting hurricane-related expenditures. There’s also a huge amount of home equity available for owners to borrow against for home improvements across the country,” said Seiders. Seiders foresees only a bit more tightening of monetary policy by the Federal Reserve in the coming year, thanks to the expectation that inflationary pressures will be kept in check. The average rate on a 30-year, fixed mortgage, recently around 6.3 percent, should inch up gradually to about 6.75 percent by the third quarter of 2006 and average about 6.6 percent for the year as a whole. The pace of home price appreciation will be cut about in half over the next year, from an estimated average of 10.7 percent for 2005 as a whole (according to the OFHEO house price index for home purchases) to 6.5 percent in 2006 and about 4.4 percent in 2007. The rate of price appreciation may have peaked in the second quarter of this year, Seiders noted, observing that many builders are reporting increased buyer resistance to the higher costs of housing and are turning to buyer incentives such as upgraded options to help maintain sales volume. “It’s pretty obvious at this point that the real estate market is gradually shifting to more of a buyer’s market,” said Glassman. “This has been a case of real estate prices catching up to market fundamentals – not a ‘bubble.’” With this in mind, “It’s reasonable to assume that house-price appreciation will be slowing down to the single digits.” Glassman’s description of the economic outlook for 2006 is “growth without the steroids.” In other words, he explained, conditions will be relatively good but without the benefit of tax cuts or cuts in interest rates by the Federal Reserve. He too sees core inflation remaining relatively tame in 2006, gauging it at between 1.75 and 2 percent, which is why the Fed should be able to refrain from tightening monetary policy more than once. Overall, Glassman believes we’re just hitting the midpoint of an economic expansion, and “The next several years should present a good backdrop for growth with low inflation. It looks to me like a pretty good – if not ‘boomy’ – outlook for the housing sector,” he concluded.

Source: NAHB

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