Eye on the Economy - 10/05/2005

The Red Cross has updated its “disaster assessment” for Hurricane Katrina and also has provided an assessment for Hurricane Rita. The two hurricanes destroyed an estimated 356,000 housing units, with 353,000 attributed to Katrina. This was more than 12 times the number destroyed in any previous natural disaster (or series of disasters) in the nation’s history.

Furthermore, 146,000 units suffered "major" damage (not currently habitable), 184,000 had "minor" damage (could be occupied) and an additional 206,000 had "extremely minor" or "nuisance" damage such as a few missing shingles or broken windows. Four-fifths of the "destroyed" housing units (uninhabitable and beyond repair) are in Louisiana and nearly one-fifth are in Mississippi, while Alabama and Texas got off quite lightly in this regard. Total damaged housing units (needing major, minor or extremely minor repairs) amounted to 329,000 in Louisiana, 173,000 in Mississippi, 33,000 in Texas, and about 1,000 in Alabama.

The Red Cross has been trying to categorize destroyed or damaged homes by type of unit. Current estimates say 88% of destroyed units are single-family homes, 11% are apartment units and less than 1% are manufactured homes. Census Bureau numbers, on the other hand, show that about 15% of the housing stock in Louisiana, Mississippi and Alabama consisted of manufactured homes in 2000. Thus, it's likely that the Red Cross has been categorizing many destroyed or damaged HUD-code housing units as conventionally built single-family homes.

Whatever the exact numbers, it's perfectly clear that the cleanup, repair and rebuilding process in the wake of Katrina and Rita will be immense and that the implications for residential maintenance and repair, spending on improvements (including replacements of major systems), manufactured home shipments and conventional housing starts are profound. The timing and composition of the process will depend heavily on the pattern of government responses.

The government's housing assistance to hurricane victims is still taking shape...

Residents of both "destroyed" housing units (256,000) and those suffering "major" damage (146,000) lost their homes to the hurricanes, making up the roughly one million persons that have been referred to as "displaced." Many residents of units with "minor" damage (184,000) presumably left their homes temporarily, pending repairs.

Some persons who lost their homes naturally moved in with friends and relatives ("doubling up") in or close to the affected areas, while others presumably found market-rate apartments not far from the impacted areas. But very large numbers of displaced households wound up in shelters or makeshift housing across a wide geographic area and immediately became the subject of a potentially massive federal government response. FEMA came out of the box with controversial contracts for the provision of temporary housing units by a handful of very large corporations, and the word went out that the government also was prepared to purchase about 300,000 "mobile homes" —presumably some combination of HUD-code manufactured homes, travel trailers that are pulled by trucks, and self-propelled recreational vehicles. On September 15, the President also proposed an "Urban Homesteading" initiative that would provide evacuees access to government-owned property in the impacted region through a lottery system.

The Bush administration had planned to move Katrina victims out of shelters by mid-October. However, the temporary housing/mobile home concepts seem to have only limited potential and Urban Homesteading is not off the ground. Furthermore, movement toward a rental-assistance approach that would rely on the existing stock of apartments across a large geographic area (a great idea) is not yet in gear.

With little else working, many evacuees gravitated from shelters to hotel/motel rooms arranged for by the Red Cross and paid for by the federal government. This route was supposed to shut down on October 15, but the Red Cross and FEMA have just extended the program for an indefinite period. The Red Cross reports that 438,000 people were living in about 141,000 hotel/motel rooms on October 2 — a number that has been growing rapidly. With this kind of momentum, the pattern of eventual movement of evacuees to more permanent rental or owner housing (including mobile homes) is highly uncertain. [return to top]

Long-term interest rates firm up and the Fed paves the way for more tightening...

The hurricanes definitely put more stress on energy markets and raised estimates of energy costs for the balance of this year and in 2006. Higher energy costs definitely exert a drag on real (inflation-adjusted) economic growth but create an inflationary impulse at the same time, creating a real dilemma for our central bank.

At this point, financial markets have assumed that the negatives of higher energy costs for real economic growth will be roughly offset by the positives associated with the fiscal response to the hurricanes, while the higher energy costs are an unambiguous problem for core inflation. Moreover, the markets perceive that the Federal Reserve shares this perspective and will continue on its determined march toward monetary neutrality — a view telegraphed by a number of Fed spokespersons in recent weeks.

These market judgments have been moving long-term rates up systematically from the post-Katrina lows. The 10-year Treasury yield now is hanging around 4.35% and our forecast shows further moderate increases over the balance of this year and in 2006.

As for the Fed, another quarter-point increase in the federal funds rate is in the cards at the FOMC meeting on Nov. 1, and the funds rate may very well reach 4.5% by Jan. 31 as Chairman Greenspan's term runs out. If so, it's likely that the Fed will then go on hold for a while.

The national housing market should cruise through the hurricane season in good shape...

Housing market indicators painted a fundamentally positive picture through the pre-Katrina period (essentially through August). Single-family starts and permits for August held in the record range established during other recent months, sales of existing homes (based on closings) displayed a similar pattern, and "pending" sales of existing homes (based on contracts signed) actually moved up to a new record in August. Sales of new homes fell off in August following a record pace in July, but statistical problems contributed to recent monthly volatility.

For the post-Katrina period, NAHB's single-family Housing Market Index fell by 2 points in September, dominated by an 8-point drop in the component for sales expectations that apparently reflected heightened uncertainties immediately following the hurricane (the survey is conducted in the first 10 days of the month). It's reassuring that the weekly index of applications for mortgages to buy homes (Mortgage Bankers Association series) was quite steady throughout both August and September (4-week moving average basis). [return to top]

The housing outlook still shows some fade in activity from record levels...

Our forecast still shows a modest fade in home sales and housing starts in the final quarter of this year, on the assumption that hurricane effects will take a slight toll and that investors/speculators will become a smaller factor in the markets. We're still projecting year-over-year declines of roughly 5% in 2006, provoked primarily by a higher interest rate structure.

We've already beefed up our projection of manufactured home shipment during the next five quarters (to 145,000 in 2006), and housing starts could turn out to be higher than projected if the post-hurricane reconstruction process gets into a decent gear. We'll just have to monitor that pattern as time goes by. [return to top]

Homeowner finances remain quite healthy...

Anti-housing forces, including many in the media, have been insisting that heavy borrowing against housing equity has been pushing homeowner finances to the brink of disaster. Indeed, Federal Reserve Chairman Alan Greenspan recently unveiled Fed research showing home equity "extraction" of about $600 billion in 2004, and borrowing against equity could be even bigger this year.

These are staggering numbers, of course, but they don't actually mean that something has gone wrong. Indeed, the Fed's own national balance sheets show that homeowner equity grew to $10.5 trillion by mid-2005, up by 18% from a year earlier. Furthermore, the aggregate housing debt-to-value ratio stood at 43% at mid-year, lower than at any time in recent years.

It's also clear that mortgage debt repayment is not placing an undue burden on the income of America's homeowners — partly because mortgage debt has been substituting for a lot of shorter-term, higher-cost, consumer debt. Indeed, the Fed's Financial Obligations Ratio for homeowners was only 16.37% in the second quarter, compared with 28.87% for renter households.

While the media may be able to find and highlight debt-strapped homeowners, the overall picture shows remarkably healthy homeowner finances and a housing equity nest egg that could withstand very large unforeseen shocks. Even Chairman Greenspan concedes these points. [return to top]

Don’t miss NAHB’s Fall Construction Forecast Conference...

See what's on the horizon for the housing industry at the semi-annual gathering of the country's premier economists and finance experts. Get the latest forecasts on housing starts, interest rates and other economic bellwethers at the Fall Construction Forecast Conference on Oct. 19 at the National Housing Center in Washington, D.C. Visit www.nahb.org/conference for more information. [return to top]

Want to know your state and metro forecasts for 2006?

Anticipate the trends, make better decisions and improve your bottom line. HousingEconomics.com, the online publication from NAHB Economics Group, is your single source for market analysis, forecasts, housing statistics and more. In-depth analysis and detailed Excel tables and overviews are available for all the state and metro forecasts.

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Give your perspective on the new NAHB economics blog...

Give your economic perspective on NAHB's new economics blog, “Seiders on Housing,” launched earlier this month. "Seiders on Housing" is an informal Internet-based discussion forum dealing with topical economic issues, housing trends, survey research and other topics affecting the housing sector of the economy.

Eye on the Economy - 10/05/2005 (Plain Text Version)

The Red Cross updates hurricane damage assessments…