Home Building Hits High Note in 2002 and Expected to Lead Economy This Year

Jan. 24, 2003
The news coming from a press conference at the 2003 International Builders Show in Las Vegas gave the 70,000 attendees from 70 different countries and

The news coming from a press conference at the 2003 International Builders Show in Las Vegas gave the 70,000 attendees from 70 different countries and 1,300 vendors reason to cheer: It looks like another solid year for home builders.

According to David F. Seiders, chief economist of the National Association of Home Builders (NAHB), Washington, D.C., single-family housing starts should total 1.633 million units in 2003.

Those predicted numbers, down about 3 percent from 2002 starts, point to another strong year for home building. Multifamily housing starts should follow a similar downward trend, falling about 4 percent from 2002, Seiders said.

“A strong housing sector is leading a struggling economy into 2003,” said Seiders.

This year's NAHB forecast for housing and the economy is based on three critical assumptions, Seiders said:

  • The Iraq situation will be resolved to U.S. satisfaction, either through a short conflict or Saddam Hussein's departure from power, early in the year.

  • North Korea's nuclear saber-rattling will move to the back burner due to diplomatic negotiations.

  • No economic stimulus package will be put in place by the U.S. government — an unlikely assumption, given the maneuvering on both sides of the aisle in Washington in favor of a stimulus plan.

Miscalculations on Iraq or North Korea would have negative impact. But the likely prospect of a federal economic stimulus package to help the stumbling economy — either President Bush's proposal or alternatives proposed by Democrats — would help housing and require an upward revision to the forecast, Seiders said.

Rising home values and historically low mortgage interest rates are two factors that have kept home building strong. “The interest-rate story is so positive for housing, it's hard to believe it,” Seiders said.

The economic recovery, virtually invisible in 2002, should pick up speed in 2003, said Frank E. Nothaft, chief economist for Freddie Mac. He expects inflation and interest rates to stay low, although mortgage rates will climb somewhat from their current near-historic low mark.

Job growth in the United States will improve as a whole — an obvious plus for home building. “Jobs are the reason that houses get built,” said Stanley F. Duobinis, NAHB's director of forecasting. “But job growth will vary regionally, with areas with larger manufacturing or high-tech bases lagging behind.”

The infamous housing bubble doesn't exist, Nothaft said. “There's absolutely no house-price bubble on the national level, and I don't believe there's any bubble on the local level either,” he said.

While home value growth slowed to 3 percent to 4 percent by the third quarter of 2002, it should grow at 4 percent to 5 percent in 2003, Nothaft said. With job growth back in the picture for 2003, demand for new homes should stay strong he added.

Housing market characteristics are the opposite of typical bubble patterns, such as the Internet stock crash of 2000, Nothaft said.

“House price growth will decelerate from the levels we have enjoyed in the last few years,” Mr. Nothaft said. “But we are not going to see a crash in national house prices — absolutely not.”

Homes generally are purchased for use, rather than purely for investment. The cost of buying and selling homes is high, leading to less turnover. And homes are typically a long-term investment, staying in the family for an average 14 years, Nothaft said.