As for the economy, real gross domestic product (GDP) growth "has been very good for the last year and a half," said Seiders. He expects it to "subside gradually" over the next two years.

Single-family housing starts have been very strong for the last several years. Seiders expects these starts to begin fading in the 4th quarter of this year, and continue on a slight decline for 2006 and 2007. Katrina rebuilding will offset some of the decline, but he still believes that starts will go down. Multifamily housing starts, on the other hand, will hold at about the level they are now.

Overall, Seiders forecasts total housing starts for 2005 of 2.03 million, dropping to 1.94 million in 2006 and 1.88 million in 2007.

Oil, Natural Gas Concerns

David Wyss, chief economist for Standard & Poor's, said that after a strong 2004, growth is slowing. He noted that higher oil prices could stall the economic expansion. "The big thing that can go wrong in the short term is oil prices," he stated.

Katrina caused a temporary spike in oil prices. Refineries were operating near capacity and about 20 percent were shut down. As a result of the hurricanes he expects to see some building of refineries.

The real problem for the upcoming winter is natural gas production and prices, Wyss said. "If this is a colder than average winter, stock up on sweaters."

Maury Harris, chief U.S. economist and managing director, United Bank of Switzerland (UBS), provided a "soft landing economic outlook." He said that real GDP growth in 2005 of around 3.5 percent would slow to around 3 percent in 2006. The federal deficit as a percentage of GDP would be 2.6 percent in 2005 and around 3 percent in 2006.

His growth forecast drivers are recent good gains in profits and labor market income. There is reduced slack and higher-capacity utilization, he said.

The major downside risk is that the purchasing power drag from high energy prices continues. However, he proclaimed, "Each $10 increase in crude oil prices subtracts only around 0.2 percent per year in real GDP growth in each of the following two years."

He expects Katrina to add about 0.5 percent to GDP over the next two years.

Regional Housing Outlook

Mark Zandi, chief economist for Economy.com, said that home sales will weaken in 2006 and 2007 followed by a drop in housing starts. Starts in 2005 will be 2.05 million, he predicted, while 2006 will be a "reasonably good year" at 1.96 million due to Katrina rebuilding. But starts will "cool off measurably" to 1.63 million in 2007.

"Housing is increasingly overvalued," Zandi stated, on average by 15 percent. A lot of the highly overpriced housing is in California, Florida, and much of the Northeast corridor.

Overbuilding is increasingly evident in most of the Midwest and parts of the Mountain West. But California, Florida, and the Northeast are not overbuilt, which is a positive, he said.

"The home has become a cash machine," said Zandi. People are very willing to pull cash out of their homes through home equity borrowing and refinancing. Again, California, Florida, and the Northeast are pulling a greater than average share of money out of their homes.

Housing affordability is affecting migration patterns - people are moving from high-priced cities to more affordable cities, he said. In Florida, for example, people are moving from Miami to other cities in Florida such as Lakeland, Jacksonville, Titusville, and Port St. Lucie.

Because of the previously cited conditions about overpriced regions and overbuilding, the most at-risk metro housing markets, he said, are in California, Florida, and parts of the Northeast and Midwest.

Bernard Markstein, director of forecasting for NAHB, also addressed regional housing patterns. He noted that 2004 was a pretty good year for housing, 2005 is shaping up better, while 2006 shows the first indication of a bit of a slow down.

In 2005, the housing market in the Midwest is relatively weak compared to the rest of the country, he said. In 2006, it will still be weak in the middle of the country.

Population growth is occurring primarily in the West and Southeast, with total net migration happening mostly in these regions. Net immigration is strong in California, Texas, Florida, and New York. Employment growth has been the strongest in the West, Markstein said. This growth will slow in 2006.

Growth in housing starts was weak in the Midwest in 2004. In 2005, the Midwest has improved. In 2006, starts show weakness throughout the country, he remarked.

More people are buying second homes, however, and "that will help hold housing starts up," stated Markstein.

Publication date: 11/21/2005