Economists predict solid housing market as year progresses

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Looking at how housing and the economy will perform now that the negative impact of war in Iraq seems to be fading, economists gathered for the National Association of Home Builders' semi-annual Construction Forecast Conference April 29 predicted significant improvement beginning in the year's second half.|ret||ret||tab|

Most panelists agreed that housing construction in 2003 will likely equal or slightly surpass last year's 1.7 million units, with single-family activity remaining strong and multifamily production receding only slightly. |ret||ret||tab|

One reason is that the Federal Reserve is unlikely to increase interest rates until late in the year, or possibly not until early next year. As a result, long-term mortgage rates in 2003 will be about half a percentage point lower, on average, than in 2002, climbing only slowly from their current 5.8 percent range as the year progresses.|ret||ret||tab|

In an example of how one sector's demise has benefited housing, NAHB Chief Economist David Seiders noted that the skilled-labor crunch and building material prices have both eased for home builders as a result of a substantial dip in nonresidential construction.|ret||ret||tab|

While housing has contributed to growth in the nation's economy through the past recession and into the current period, Seiders said that one question for the economy is what will happen when housing activity tapers off and is no longer a "growth engine" for the Gross Domestic Product. He noted that the housing component of GDP grew 12 percent in this year's first quarter faster than any other part of the economy. |ret||ret||tab|

"Residential fixed investment accounted for fully one-third of total GDP growth in 2003's first quarter, even more than the substantial support it provided in 2002," he said.|ret||ret||tab|

David Wyss, chief economist for Standard & Poor's, said that he doesn't expect business spending to "take the lead" in the economy anytime soon because only 73 percent of the nation's industrial capacity is being used. |ret||ret||tab|

Also, consumers, who demonstrated resilience in the aftermath of Sept. 11 and in the midst of significant job losses, appear to be "spent out." As a result, he expects the recovery to be "disappointing" and "sluggish" for a few more quarters.|ret||ret||tab|

Wyss forecasted that capital spending on equipment and high-tech would proceed at roughly half the 15 percent growth rate typical of a vigorous economic recovery. Most of the demand is for replacement of obsolete computers, "and that doesn't get us back to boom times," he said.|ret||ret||tab|

On a positive note, fiscal stimulus including about $100 billion spent on the war and a tax cut of about $450 billion will help keep the economy growing, Wyss noted, and strong monetary stimulus is already in place. |ret||ret||tab|

But don't look for much help from the stock market, which, according to Wyss, has entered into "a period of sub-normal gains." His prediction: "The market will level off and will look a lot less exciting than in the 80s and 90s."|ret||ret||tab|

Frank Nothaft, chief economist for Freddie Mac, said that fiscal and monetary stimulus will push economic growth toward an annual rate of 4 percent in the second half of 2003, up from about 2 percent to 2.5 percent in the first half. He also said that mortgage rates, which have been at their lowest levels in more than 40 years, will continue to be "a powerful stimulant to the housing sector" and predicted that 30-year, fixed-rate mortgages will average between 5.75 percent and 6.25 percent throughout this year.|ret||ret||tab|

As interest rates push higher, he noted, the current refinancing boom should lose some steam. But there are at least a couple more good months in store for refinancing. As Nothaft explained, refinancing an average $130,000 to $140,000 home loan last year reduced monthly payments by $100.|ret||ret||tab|

"That extra $100 per month in a family's pocket is as good (a stimulus to spending) as a tax cut," he said, adding that, in cash-outs from refinancing last year alone, homeowners took away an extra $90 billion from the settlement table.|ret||ret||tab|

Panelists forecasting the direction of home prices at the Construction Forecast Conference noted that the annual rate of house price increases is tapering off in most parts of the country. NAHB's Seiders said that, from a peak of about 9 percent nationally at the beginning of the 2001 recession, annualized increases have receded to some degree and should decelerate a bit further, eventually settling in at the 4 percent to 5 percent range. He added that media speculation about house-price "bubbles" will likely fade as the economic recovery progresses.|ret||ret||tab|

Freddie Mac's Nothaft said that housing simply has none of the characteristics typical of assets that can experience sharp price declines. Such assets tend to be purely for investment purposes and offer highly speculative returns, can be purchased or traded at low transaction costs, and are held for a relatively short period of time none of which characterizes the typical American home. "I haven't heard of anyone who's a day trader in housing," he said.|ret||ret||tab|

Nothaft added that the inventory of homes for sale is "at its lowest level in 30 years," and this, too, is evidence that a so-called "bubble" isn't forming. "You need oversupply" for a price bubble, he said.|ret||ret||tab|

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