NAHB economists see slower growth, but no recession

Despite weakening job markets and a faltering stock market, the U.S. economy is unlikely to go into recession in the coming year, according to economists for the National Association of Home Builders.

The economists voiced their views on upcoming economic and housing market conditions at the 63rd semiannual Construction Forecast Conference in Washington, D.C., according to an NAHB news release. Most expressed guarded optimism that prevailing strength in the housing market will help the nation skirt recession.

NAHB Chief Economist David Seiders acknowledged that economic risk factors have increased, but said the good news is that "Housing is holding up quite well." With short-term interest rates falling and long-term mortgage rates hovering near 7 percent, the market "is one of the few bright spots in the economy," he said.

Despite the housing sector's positive contribution, most analysts were estimating that first-quarter Gross Domestic Product growth was around 1 percent; however, the official Commerce Department report, released after the conference, showed a 2 percent gain. This was largely because of unexpected strength in international trade and government spending.

"It is almost inconceivable that housing numbers will be rising with further declines in consumer confidence and rising unemployment," Seiders said. As a result, "We are forecasting modest declines for housing this year."

NAHB predicts that total housing starts will hit 1.56 million units in 2001, down 2.6 percent from last year. The year 2000, however, was one of the best years in history for housing production.

Joel Prakken, chairman of Macroeconomic Advisors, agreed that "Housing has fared relatively well because of the nature of the slowdown." He attributed the weakening economy primarily to "a drop in fixed-investment spending, which is putting downward pressure on mortgage interest rates" and thereby spurring home sales.

Although the manufacturing sector, approximately 20 percent of GDP, already is in recession, the overall economy will avoid negative growth for several reasons, Prakken said. First, consumer spending and construction spending are "hanging in there," and second, the outlook for some easing of energy prices is fairly good. Businesses also will complete inventory adjustments by the end of the second quarter, and there also is an expansionist trend among monetary and fiscal policies.

Prakken also pointed out that despite all the media attention on high-tech woes, the high-tech industry is not in recession, but merely experiencing a decline in its rate of growth.

Aubrey Lanston & Co. Chairman and Chief Economist David Jones is less optimistic, predicting "a miserable growth rate for the first three quarters of the year less than 1 percent in the first quarter, 1 percent in the second quarter and below 2 percent in the third quarter."

Jones said, "We're in an extremely vulnerable period. We'll probably avoid a recession, but the low growth rates will make it feel like one."

According to the NAHB, some of the greatest strength in housing markets this year has been in the multifamily sector, and there is good reason to believe this area will continue thriving. "Multifamily starts have been cruising at just the right altitude, staying close to 300,000 units annually for the past four years," noted Jack Goodman, principal of Hartrey Advisors. Given that sustainable pace and the fact that rents are rising steadily while vacancy rates are quite low, he said, apartments have become "the darling of the investment community."

Goodman added that "Public policy in some jurisdictions is becoming much more friendly toward urban development of multifamily housing, and the clamor for shorter commutes and smarter growth is accelerating."

Agreeing with Goodman's assessment, JPI Vice President Kimberly Fiala noted that her company one of the nation's largest apartment developers has primarily been looking at infill sites for both new development and rehabilitation opportunities.

Regional forecasters Stanley Duobinis of NAHB and Steven Cochrane of Economy.com agreed that the long-enjoyed wave of economic expansion is now slowing in markets nationwide.

This slowdown is particularly apparent in the Midwest and Southeast, where durable goods manufacturers are concentrated and jobless claims have increased the most.

On the upside, said Cochrane, it looks like some stability may be returning, especially to the Midwest. Citing statistics showing that average weekly hours worked in manufacturing rose significantly between February and March 2001, he noted that weakness now seems to be shifting to the West as the high-tech industry slows and business confidence falters. "Venture capital has all but abandoned the dot-com industries," he said.

Cochrane also pointed to a nearly 300 percent increase in layoff announcements in high-tech hotbeds throughout California and bordering states, but he noted that despite this evidence of weakness, the West remains the leader in terms of overall job growth in the last year.

"There really are no states where job growth is accelerating right now except Wyoming," where mining operations are booming, he said. But surprisingly, in terms of year-to-year job growth, "The Northeast is really a rather robust economy."

As for the near-term forecast, Cochrane said the direction of consumer confidence will largely determine the Midwest's chances of regaining stability.

Just as weaker economic conditions are appearing across most states, housing markets across much of the nation are slowing, said Duobinis, NAHB's director of forecasting. "Local housing demand is largely a function of local household creation and household creation depends heavily on job creation," he said. Duobinis noted that states with the most rapidly expanding housing markets between 1999 and 2000 were primarily located in warm climates where high-tech industries flourished.

Noting that the 10 weakest states for housing demand in 1999-2000 were largely in the Midwest or "Midwest-South," Duobinis listed them as Ohio, Indiana, Kansas, West Virginia, North Dakota, Illinois, Missouri, Alabama, Iowa and Mississippi.

The final session of the Construction Forecast Conference provided a forum for discussing the changing characteristics of new homes. Larry Zarker of the NAHB Research Center presented results of recent builder and consumer practices surveys.

He noted several trends that have emerged in the last five years:

Houses are getting larger, more complex and more expensive per square foot.

Durable materials such as fiber cement, vinyl siding and heavyweight asphalt roof shingles are gaining market share.

Builders are "dressing up" highly visible areas of the home; for example, use of ceramic tile or hardwood in the entry foyer and hallway has increased; cedar decking and composite decking has increased; and use of high-end brick and stone facades is on the rise.

Many alternative structural materials, such as steel for wall framing and insulating concrete forms, are slowly gaining a foothold in single-family home construction.

NAHB economist Michael Carliner commented that a key factor behind market demand for new products and materials is the evolving demographic profile of the U.S. population in general and home buyers in particular.

As the graying of America continues, he said, the housing market is seeing a larger share of trade-up buyers.

The median age of purchasers of newly built homes has increased from 35 years in 1985 to about 40 years today, Carliner said. Meanwhile, "Median home sizes have increased pretty much every year, except in recessions."

Carliner said, "Older home buyers tend to favor putting more money into higher quality amenities" instead of raw space such as unfinished basements. While homes and their garages have trended larger in recent years, he said, lot sizes have actually gotten smaller due in part to higher land costs.

This poses an interesting dilemma because NAHB consumer surveys show that most buyers today want a single-level home a preference that increases as the consumer's age increases. "How we'll fit larger homes with larger garages and one-story floor plans on smaller lots will be interesting to see," Carliner said.