Single-family housing starts are expected to remain at high levels, according to NAHB’s forecast, declining slightly from 1.5 million units last year to 1.488 million in 2004 and 1.422 in 2005. Bolstered by growing strength in the condominium market, this year’s multifamily construction is forecast to remain at last year’s 348,000-unit level, with a drop to 320,000 units next year.
Seiders said that the industry doesn’t need to worry about a housing price bubble precipitated by the upward direction of mortgage rates. “We’re already past a contraction in payroll employment and jobs and income are in a growth mode,” he said, “so prices won’t contract because the real economy is coming on strongly.”
But the surging prices of framing lumber, wood panels and products made of iron and steel scrap are vexing for builders, he said, and there is no clear way of knowing when relief will be in sight. Wood prices have resulted largely from strong demand and inadequate production capacity, and steel prices have exploded because of massive shipments from the U.S. to China.
Additional demand for building materials and labor could be coming from non-residential construction, which is stabilizing following a 25% decline that had been beneficial for home builders, he said.
While not entirely sanguine about prospects for the economy and the housing industry in the next couple of years, David Wyss, chief economist, Standard + Poor’s, concurred with Seiders that growth in employment and income are heading for higher ground, which is a good thing for housing.
Noting that half-a-million jobs were created in this year’s first quarter, Wyss said that “jobs are finally starting to show up, about a year and a half behind schedule” and that the economy should continue to improve “nicely,” unless it is derailed by events in the Middle East, a terrorist attack or an unlikely spike in oil prices.
Wyss predicted that increases in the core Consumer Price Index are heading up to the 2% level, which will get the Fed moving shortly to start pushing interest rates toward a “neutral” 3.5%-4% level, “neither touching the brake nor the accelerator,” he said. “That lets the economy move at its own momentum.”
“As mortgage rates rise,” Wyss said, “mortgages won’t be as affordable, but they will still be low by historic standards.” He added that the increase in rates shouldn’t have much impact on first-time buyers but it could have somewhat of a dampening effect on the trade-up market from home owners who are discouraged by the added financing cost.
Measured in terms of the ratio of average home price to average household disposable income, he said that house prices were currently a bit higher than the historic average, which could lead to “a couple of years when home prices go sideways rather than down.”
More bullish than Wyss about the prospects for housing in “a surging economy,” Jim Glassman, managing director and senior economist for JP Morgan Chase, said that the creation of new jobs, productivity-driven increases in income growth and low inflation will help the industry continue to prosper despite a change in Fed policy.
As the result of Fed policies since the early 1980s, the economy has now moved into a low-inflation “zone,” Glassman said, where interest rates no longer need to be higher than normal to push prices down. “We are moving into an era where the real federal funds rate will be lower than we are used to, and that’s an environment that can’t hurt housing.”
Glassman added that he would be surprised to see the Fed increase interest rates this summer “because employment is a long way from where it needs to be.” The rate of job creation needs to increase to a steady monthly rate of 200,000-300,000 he said, a process that has only recently begun as the gross domestic product has started growing faster than the economy’s underlying “trend” that’s based on labor force and productivity growth.
Housing’s banner performance can’t be explained adequately by interest rates, he said. A better explanation is the tripling of nominal personal income that has occurred over the last decade, compared to a doubling of housing prices. Faster productivity growth, he said, enables companies to generate more profits, which in turn eventually enables them to pay their workers more generously.
Once employment returns “to the right altitude,” Glassman predicted that there will be “a whole lot more income for the household sector,” roughly offsetting higher interest rates.
“Coming into a new era where we don’t have to be obsessed about bringing down inflation,” the Fed should keep its federal funds rate “neutral,” meaning a “real” rate of about 2%, he said.
Photos by Morris Semiatin