Driven by ongoing population growth and household formations, an expanding market for second homes, and the need to replace aging units, demand for housing should hold up well in the foreseeable future, the panelists said. Also, further growth in the nation's job force and rising incomes should help offset the negative impact of higher mortgage rates, which are still expected to be at affordable levels by historic standards.
One unanswered question at the conference pertained to the state of the nation's job market. "There are deep uncertainties about the issue of slack in the labor market," noted David Seiders, NAHB's chief economist, and that's a big reason the Fed has been moving so cautiously as it tightens monetary policy.
Unemployment fell to 5.3 percent in the first quarter, and Seiders predicted it will continue downward to about 5.1 percent in 2006. That may be as low as it can go without generating some inflation, he said.
"We're only in the second inning of economic recovery," said Jim Glassman, managing director and senior policy strategist with J.P. Morgan Chase. While payrolls have returned to where they stood at their peak in February 2001, "the number of people who have come of working age has increased by 9 million" in that same time frame. Confronted with the bad job market that stubbornly persisted long after the end of the 2001 recession, many young potential workers decided to head back to college.
"There are about three million of them out there, and there is a good chance they will be coming into the job market soon," Glassman said.
Estimating annual housing demand at 2 million units over the next decade, Glassman also said that recent productivity gains bode well for housing in the period ahead because they have bolstered corporate profits, which in turn should lead to increasing wages. With current annual productivity gains in the 2.5 to 3 percent range, he said, America's standard of living will double in a single generation. This compares to the 1 percent productivity gain of the 1970s and 1980s, a rate at which it took three generations for the living standard to double.
On the other hand, Chris Varvares, president of Macroeconomics Advisers, estimated that today's expansion is "in the bottom of the seventh inning," and doesn't expect too much more improvement on the employment front. He sees the economy settling in for a soft landing and 3.4 percent GDP growth for the year as a whole.
Varvares also expects to see some measurable decline in housing activity next year, but sees no recession on the horizon and pegs sustainable GDP growth at 3.5 percent. Agreeing with Varvares's assessment of the first-quarter economic slowdown that has continued into the current quarter, NAHB's Seiders predicted that "we do come out of it, we do better, and we glide out in 2006" with "pretty good" GDP growth in the 3.2 percent to 3.5 percent range.
Publication date: 05/16/2005