Residential construction forecast: Slower in 2000

June 1, 2000
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WASHINGTON, DC — At CMD Group’s fourth annual North American Construction Forecast held here at the National Press Club, Robert Barr, a senior economist with Fannie Mae, Washington, DC, told attendees that following record levels in home sales in 1999, housing activity will slow somewhat in 2000.

Residential construction is expected to dip in 2000 as the economy slows and refinance numbers go down, but will rebound in 2001, Barr said.

“Higher rates have really choked off the refinance market,” he added. Long-term interest rates have risen, topping 6% on the 10-Year Treasury. Thirty-year fixed-rate mortgages have gone up as well. A slower economy should allow the rates to fall.”

It is likely that 1999 will be the fourth consecutive year of record new home sales, but 2000 should see an 8% to 10% drop in sales, followed by a slight recovery in 2001. “Even with that drop-off in 2000 . . . 2000 would still be the third best year ever after 98 and 99,” Barr said.

The big picture

Looking at the economy overall, Barr said he expects the strong growth to be moderate over the next year. Gross Domestic Product growth may be beginning to slow as well.

The Fed tightened interest rates twice over the summer and is expected to raise them again at its November 16 meeting. Barr said he expects inflation to remain low, with modest increases of only 21/2% to 3% over the next two years.

According to Barr, personal spending has powered the recent economic boom. Consumer confidence is strong, but there may be early signs of a slowdown, he said.

“A lot of consumer spending has been fueled at least in part by the wealth-effect of the stock market,” Barr explained. If the stock market continues to go down or move sideways, it will remove one of the impetuses for continued consumer spending and may also affect remodeling jobs and home purchases.

Barr said productivity growth by U.S. workforces has been heading up toward 2% and seems to be growing and stabilizing at a higher rate.

The major reason for productivity growth seems to be the sharp declines in technology prices, which has lead to the application of technology to many processes, including inventory control.

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