NAHB predicts solid housing, economic growth in 2002

Activity in the nation's home-building industry is expected to hold up fairly well against a general decline in economic growth during the final two business quarters of this year, according to economists and various housing representatives at the National Association of Home Builders' new National Housing Center.

While the Sept. 11 terrorist attack on America has had a negative impact on consumer confidence, Housing Center speakers reported that a healthy number of prospective home buyers remains in the marketplace, and that low mortgage interest rates are helping to moderate the housing slowdown that is now occurring, according to an NAHB release.

"We're in an entirely different world in how housing and the economy will evolve," said Bruce Smith, National Association of Home Builders president. A low inventory of unsold new homes, aggressive interest-rate reductions by the Federal Reserve, tax cuts and other fiscal stimulus, and low inflation all run counter to the economic indicators that usually signal the start of a recession, he noted.

For the past year, the role of housing has been anything but typical, he said, as "it held up strong as the economy weakened," saving growth of the Gross Domestic Product from turning negative. New residential construction alone ac-counts for 5 percent of the GDP on average and 14 percent when related financial and other activities are included.

Conceding that it has been "extraordinarily difficult" to assess the state of the economy in the aftermath of Sept. 11 and that "there has never been this degree of uncertainty on where the economy stands," David Seiders, NAHB's chief economist, offered a fairly upbeat, short-term outlook for housing.

He predicted that the Federal Reserve will reduce its federal funds interest rate by 25 basis points at its next two policy meetings in order to help stabilize the current economic situation. At 2.5 percent, that rate now stands at its lowest point since the Kennedy administration.

Today's 6.6 percent fixed-rate mortgages and 5.25 percent adjustable rate mortgages are "a key cushion for the housing sector," said Seiders. However, he expects the Fed to "take some of the easing back" as the economy resurges, pushing the federal funds rate up to 4.5 percent by the third quarter of next year.

As for the bad news, Seiders predicted minor declines in GDP growth of 1 percent in this year's third quarter and 2 percent in the fourth. The unemployment rate is headed from 4.9 percent to 5.8 percent in next year's second quarter, and single-family housing starts in the final quarter of 2001 should trail the previous quarter by 10 percent.

The good news, according to Seiders, is that this "short, relatively mild" downturn should be followed by "quite strong" growth during the second half of next year.

The two other economists at the press conference concurred with Seiders' forecast.

Citing surveys by the University of Michigan, David Berson, chief economist of Fannie Mae, said that consumer sentiment has rallied from its post-Sept. 11 lows to levels that are not nearly as deep as in previous recessions. At the same time, a tremendous drop in mortgage rates from a peak of 8.7 percent in May of 2000 is helping to support the industry by making home buying more affordable, he said.

Berson predicted that the current housing downturn would be "the smallest of any in the postwar period" and that the decade as a whole would be one of the strongest for housing growth.

Annually, he predicted 1.64 million housing starts for the 2000s, 900,000 new home sales, 5.5 million existing home sales and $1.6 trillion in mortgage originations.

After a period of strong increases, Ber-son predicted moderation in home price gains over the next year, but he said that "it is extremely unlikely that home prices will turn down nationally.

With new home inventories at near-historic lows, "home prices won't drop," he said.

Imparting "a sense of how important real estate is to the economy," David Lereah, chief economist for the National Association of Realtors, said that equity is the most important source of net worth for the 72 million households that own homes, accounting for 44 percent of family wealth. From 1992 to 2001, existing home sales increased from an annual rate of 3.3 million to 5.5 million, and the median sales price of an existing home zoomed from $98,200 to $150,000, he said. The average gain on a home sale today is $35,000 he added.

Sales traffic was down by about 10 percent immediately following Sept. 11, but it is now off by only about 5 percent, he said. And next year, housing activity should fairly quickly return to where it left off before the downturn.

Thomas Bozzuto, president of the Bozzuto Group, said there has been little softening in the multifamily housing sector in the wake of Sept. 11. The occupancy rate of the more than 9,000 units his company manages is averaging 95.3 percent today.

However, he is budgeting for smaller rent increases next year. He is planning for increases in the 3.5 percent to 4 percent range next year, down from increases of 5 percent to 7 percent in recent years.