Almost every speaker agreed that housing construction in 2003 will likely equal or slightly surpass last year’s 1.7 million units, with single-family activity remaining especially strong and multifamily production thinning only slightly. One reason given was that the Federal Reserve is unlikely to increase interest rates until late in the year, or possibly not until early next year. As a result, long-term mortgage rates in 2003 will be about half a percentage point lower, on average, than they were in 2002, climbing only slowly from around 5.8 percent as the year progresses.
However, while housing has contributed to growth in the nation’s economy through the past recession and into the current period, NAHB’s chief economist, David Seiders, stated that one question for the economy is what will happen when housing activity tapers off and is no longer a “growth engine” for gross domestic product. He noted that the housing component of GDP grew 12 percent in this year’s first quarter — faster than any other part of the economy. “Residential fixed investment accounted for fully one-third of total GDP growth in 2003’s first quarter, even more than the substantial support it provided in 2002,” he said.
David Wyss, chief economist for Standard & Poor’s, said that he doesn’t expect business spending to “take the lead” in the economy anytime soon because only 73 percent of the nation’s industrial capacity is being used. Also, consumers, who demonstrated resilience in the aftermath of Sept. 11, 2001, and in the midst of significant job losses, appear to be “spent out.” As a result, he expects the recovery to be “disappointing” and “sluggish” for at least a few more quarters.
Wyss forecasted that capital spending on equipment and high-tech items would proceed at roughly half the 15 percent growth rate that typically occurs in a vigorous economic recovery. Most of the demand is coming from replacement of obsolete computers, “and that doesn’t get us back to boom times,” he said.
On a positive note, fiscal stimulus — including about $100 billion spent on the war and a tax cut of about $450 billion — will help keep the economy growing, Wyss noted, and strong monetary stimulus is already in place. But don’t look for much help from the stock market, which, according to Wyss, has entered into “a period of subnormal gains.” His prediction is “The market will level off and will look a lot less exciting than in the 80s and 90s.”
Second-Half GrowthFrank Nothaft, chief economist for Freddie Mac, said that fiscal and monetary stimulus will push economic growth toward an annual rate of 4 percent in the second half of 2003, up from about 2 to 2.5 percent in the first half. He also said that mortgage rates, which have been at their lowest levels in more than 40 years, will continue to be “a powerful stimulant to the housing sector” and predicted that 30-year, fixed-rate mortgages will average between 5.75 percent and 6.25 percent throughout this year.
As interest rates push higher, Nothaft noted, the current refinancing boom should lose some steam. But there are at least a couple more good months in store for refinancing. As he explained, refinancing an average $130,000 to $140,000 home loan last year reduced monthly payments by $100. “That extra $100 per month in a family’s pocket is as good [a stimulus to spending] as a tax cut,” he said, adding that last year alone homeowners took away an extra $90 billion by refinancing their homes.
Regarding house prices, Nothaft said that housing has none of the characteristics typical of assets that can experience sharp price declines. Such assets tend to be purely for investment purposes and offer highly speculative returns, can be purchased or traded at low transaction costs, and are held for a relatively short period of time — none of which characterizes the typical American home.
He also noted that the current inventory of homes for sale is “at its lowest level in 30 years,” and this, too, is evidence that a so-called “bubble” isn’t forming. “You need oversupply” for a price bubble, he said.
Eric Belsky, executive director of the Joint Center for Housing Studies at Harvard University, clarified this point. “Some places, yes, may see declines,” he said. “But there need to be concentrated [local] job losses, the likes of which we haven’t seen. There has to be a glut of houses on the market for prices to fall.”
Regional OutlookAs economic recovery takes shape, albeit slowly, certain states and their major metro areas are likely to reap the benefits sooner than others, based on each one’s major industries. Mark Zandi, chief economist and co-founder of Economy.com, said the first areas on the road to recovery will be “distribution centers” as businesses begin rebuilding their depleted inventories. Such front-runners will include places like Austin, Texas; Baltimore; central New Jersey; Las Vegas; Los Angeles; Memphis, Tenn.; Oakland, Calif.; Orlando, Fla.; Philadelphia; Phoenix; Portland, Ore.; Sacramento, Calif.; San Antonio; San Diego; and Tampa, Fla.
Next in line will be metros where the software and travel industries are heavily represented, said Zandi, as companies expand their advertising, travel, and investments in computer hardware and software in a bid to increase sales. At this point, the tide of recovery should hit Atlanta; Charlotte, N.C.; Chicago; Houston; Indianapolis; Minneapolis; Salt Lake City; and San Jose, Calif. These areas will be followed by metros where telecom and money management firms have the most pull — most notably Boston; Kansas City, Mo.; Pittsburgh; and San Francisco.
Beginning in next year’s first quarter, traditional manufacturing centers like Detroit, Milwaukee, and major Ohio metro areas should start catching the recovery wave, followed by investment banking and commercial aircraft building centers, such as New York and Seattle, respectively.
Stan Duobinis, NAHB director of forecasting, observed that places where home building, defense, health care, and tourism are top industries — like Las Vegas, the Philadelphia-Washington-Baltimore corridor, San Antonio, Southern California, and south Florida — have all managed to maintain relatively stable economies and are ahead of the pack on the road to recovery.
Only five states experienced greater than 1 percent employment growth between February 2002 and February 2003, Duobinis noted. These include Alaska, Florida, Hawaii, Nevada, and New Mexico. Others on his top 10 list of the most robust economies include Arizona, District of Columbia, South Carolina, Vermont, and Wyoming. On the other side of the coin, the weakest state economies on Duobinis’ list include Connecticut, Delaware, Massachusetts, Michigan, Missouri, New York, North Carolina, Ohio, Oklahoma, and Utah.
Even if the currently robust housing market loses some steam this year, Duobinis said that single-family home sales and production will post gains in more than half of all states — primarily in the South and Southwest.
Publication date: 05/12/2003