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Housing Market To Slow In 2005

Nov. 5, 2004
The housing construction business has proved to be one of the most resilient sectors of the entire U.S. economy. While the market is expected to cool down in 2005, the pace of construction will remain at near-record levels, according to several economists at the NAHB Construction Forecast on Oct. 27 in Washington, D.C.

The tale of the housing market’s torrid growth is similar to the children’s story, “The Three Little Pigs.”

For the past few years, the big, bad economic wolves of recession, rising material costs and skyrocketing home prices in some East Coast and West Coast markets have tried to blow down the housing market. But like the house of bricks in the fable, the residential construction still stands strong.

The housing construction business has proved to be one of the most resilient sectors of the entire U.S. economy. While the market is expected to cool down in 2005, the pace of construction will remain at near-record levels, according to several economists at the NAHB Construction Forecast on Oct. 27 in Washington, D.C.

“The housing market is nothing short of phenomenal,” said David Seiders, chief economist, National Association of Home Builders (NAHB), Washington, D.C. “It’s probably the strongest single piece of the economy, but it’s reaching some limits and is flattening out.” Seiders expects single-family and multi-family housing starts to slow down in 2005 to a combined total of 1.853 million units, a 4.23-percent decrease.

Over the past few years, the NAHB forecasts have been on the conservative side, and Seiders has had to revise the NAHB forecasts because of the unexpected resilience of the housing market. This year’s NAHB forecast for total construction in 2004 is 13.82 percent higher than his 2004 forecast released last year, while his forecast for 2005 total construction is 11.76 percent higher than the forecast he released at last year’s Construction Forecast Conference.

Seiders said part of the problem in forecasting the market demand for housing is a constantly changing mix of demographic and economic factors. For instance, minorities have entered the housing market in stronger-than-expected numbers to take advantage of interest rates that remain at historically low levels. Another factor is that the improving U.S. economy has had an effect on consumer confidence. The market is also buoyed by the demand from the baby boom generation to trade up to more expensive homes, build vacation homes or purchase homes in assisted living communities for themselves or their parents.

A hotly debated topic at this and past NAHB Construction Forecasts is the possibility of a housing bubble. Mark Zandi, chief economist, Economy.com, West Chester, Pa., identified several markets that had “speculative housing markets”: the New York/New Jersey suburbs, Florida’s Gulf Coast, the Miami/Fort Lauderdale metropolitan area, the San Francisco Bay area, Boston and Southern California. But other economists disagreed, and said because most homebuyers are still buying homes in these markets based on real need and not just to “flip-and-sell” them in a speculative scheme, these markets technically aren’t experiencing housing bubbles. However, they cautioned that with interest rates expected to rise, any hiccup in the economy could cause prices to plummet.

The general health of the U.S. economy also bodes well for the housing market in 2005, according to Maury Harris, managing director and chief economist for the Americas, UBS Warburg Research, New York. He expects decent job growth in companies with under 500 employees, and looks for the gross domestic product (GDP) to increase 3.2 percent in 2005 and expects unemployment rates to drop 0.1 percent to 5.4 percent.

“As long as jobs do well, house prices should do pretty good,” he said.

All of the economists at the conference were concerned about oil prices, which had hit a high of $55-per barrel several days before the meeting. Said Mark Zandi of Economy.com, “$55-a-barrel oil is going to hurt. If oil stays at $55, we will have trouble digesting that. If we get to $70-per-barrel, we are toast.”

However, Zandi was optimistic on one long-dormant element of the economy — technology spending. He said most companies last upgraded their computer and telecommunication systems in 1999 and 2000. Equipment installed during that time is approaching obsolescence and will soon be in need of replacement.

Builders and manufacturers of building products at the conference were looking for insight on the future direction of materials costs, which have gone wild in the housing market over the past 12 months. While the electrical industry was shocked by the run-up in steel prices, the builders and vendors in the housing market have been hit by huge increases not only is steel but also a broad array of core building products such as gypsum, cement, lumber, plywood and chipboard.

John Mothersole, an analyst with Global Insight, Washington, D.C., who follows construction material pricing, said the commodities with the largest increases in 2005 have been steel mill products (43 percent), lumber (27 percent) and gypsum (20 percent). He believes commodity prices are topping out, and said the market fundamentals remain sound because the increases were caused by higher demand in the U.S housing market, a rebound in the European economy and “phenomenal Chinese growth.”

Additional factors contributing to higher prices have been higher shipping rates and transportation bottlenecks in the rail freight industry that have caused spot shortages.

The size and health of the remodeling segment of the housing market was also discussed at the NAHB Construction Forecast. Industry observers are frustrated with the lack of reliable sales numbers in this important segment of the housing industry. The U.S. Census Department estimates that annual residential-remodeling expenditures are approximately $177 billion. However, a new study by the Joint Center for Housing Studies at Harvard University estimates the market at $225 billion, a difference of $48 billion. Kermit Baker, senior research fellow at the program, is developing a leading economic indicator, based on a survey with over 50,000 households, that he believes will more reliably forecast the size of the remodeling market.