• Economist: Housing Market to Trend Down to Sustainable Growth in '02
The housing industry has helped lead the economy out of recession and to exceptionally strong gains in this year's first quarter. But both housing and the economy are expected to quickly drift down to sustainable growth levels throughout the year. This will leave the manufacturing sector and others to carry forward the economic recovery and become key engines of growth, economists said at NAHB's 64th Semiannual Construction Forecast Conference, held in late April."We're talking about 5%-plus Gross Domestic Product growth in the first quarter," says NAHB Chief Economist David Seiders. "Aided by extraordinarily good weather and low interest rates on home mortgages, housing was a star performer, averaging more than 1.7 million starts on an annualized basis."
However, this high rate of housing production and economic growth is clearly unsustainable, Seiders adds. "Because housing fared so well during the recession, there is no additional pent-up demand to lead the economy forward. Oil prices could become a problem, and the tax cuts have already provided a boost to the economy. We're looking to the manufacturing sector to fuel the expansion in the year ahead, and look for GDP to drop back to the 3.5% range in the next few quarters."
On the housing front, supply and demand seem to be well-balanced, Seiders says, with NAHB projecting overall housing starts to rise 1.7% this year to 1.64 million units and then decline 2.9% to 1.59 million units in 2003.
On the single-family side, Seiders estimates a 2.4% gain this year to 1.31 million units followed by a 3.6% reduction to 1.26 million units in 2003. Multifamily starts are expected to remain stable, down less than 1% at 329,000 units this year and virtually unchanged at 330,000 units in 2003.
Seiders' fellow economic analysts, David Wyss, chief economist of Standard & Poor's, and Joel Prakken, chairman of Macroeconomic Advisers, largely concur with his forecast.
"Government spending is boosting the economy and consumer spending has bounced back, helped by tax cuts, but business investment will have to carry the load the rest of the year," says Wyss. He adds that the recent rise in oil prices to $26.50 a barrel is not a concern, and is actually in the "normal" range for energy prices.
Wyss said that housing starts and home sales will both fall next year, but still remain at relatively high levels, and he added that housing is the most affordable it has been since the early 1970s.
Hartrey Advisors economist Jack Goodman describes the most recent decade as a "golden age" for multifamily construction—golden because developers "have been building exactly the right amount of product. There's been no overbuilding, and no collapse." But he notes that in recent months, vacancy rates have begun to rise, and absorption has fallen. He points to low mortgage rates and the resulting upturn in single-family housing, as well as cutbacks in job growth as possible causes, but predicts that new household formation will bring stability in the near term, and growth "at the top end of the market" later this year.
Housing Starts Drop in March
Finishing up an exceptionally strong first quarter, nationwide housing starts retreated 7.8% to a healthy seasonally adjusted annual rate of 1.65 million units in March, according to Commerce Department figures. The expected slip comes on the heels of the best month for new-home production in more than three years.
"Today's report shows housing production is right in line with our forecasts, and the decline is certainly no cause for alarm in the housing industry," Garczynski says. "Thanks to extraordinarily good weather and financing conditions early in the year, single-family housing starts reached their highest level in more than 20 years this February, at 1.47 million units. That pace of activity was unsustainable in terms of underlying demographic demand. In fact, builders would have had a hard time keeping up with such a pace in view of shortages of available lots for development in an era of slow-growth or no-growth land-use policies in many parts of the country."
March's decline in housing starts was confined to the single-family sector, where production slowed 11.4% to a rate of 1.3 million units. Multifamily housing starts rallied in March, rising nearly 9% to a seasonally adjusted annual rate of 343,000 units. The rise in apartment building was entirely responsible for a 15.5% gain in housing starts registered in the Northeast, while every other region recorded declines in overall housing production. In the South, the shortfall was almost 13%, while in the Midwest it was 7% and in the West it was 6.2%.
Housing permits, which can be an indicator of future building activity, also fell in March, by about 10% overall to a 1.6 million-unit rate. Single-family permits were down 10.2% to 1.2 million units, while multifamily permits were down 8.6% to 361,000 units.
"These are still quite good numbers," Garczynski says. "For the year as a whole, we're on pace to produce about 1.64 million new housing units, up by about 2% from last year."
