"The housing market has been absolutely phenomenal," he noted, but it's in the process of "topping out." With housing activity "flattening in 2005," Seiders forecast a drop in housing starts next year of about 4.2 percent to 1.85 million units, down from the 1.935 million projected for this year. Sales of new single-family homes are predicted to drop 5.2 percent from a record of more than 1.16 million this year to about 1.1 million in 2005.

Multifamily housing production continues at an annual pace in the 340,000-unit range, he said, even though demand in this sector has been softened by the attractiveness of homeownership for renter households.

The homeownership rate has been steadily trending upward, he said. "We do expect homeownership to continue to rise."

Looking at residential remodeling, Seiders sees "pretty aggressive growth" for 2004, 2005, and 2006. "The driver here is owner-occupied housing additions and alterations."

Economy Has ‘A Head Of Steam'

Maury Harris, managing director and chief economist for the Americas of UBS Warburg Research, agreed that the economy is doing well and is going to continue to do well.

We've had a tremendous amount of monetary and fiscal stimulus in the last three years, he said. The Federal Reserve cut interest rates, the president cut taxes, and Congress increased spending. The economy now has "a head of steam."

We're experiencing "a transition from a policy-driven economy to an economy that's getting back to its old self. It's on its own again," said Harris. He expects renewed job growth with somewhat slower productivity gains.

Harris expects that oil prices will retreat next year. Either there will be an easing of supply constraints, or high prices will discourage demand, getting the price down to about $35 per barrel.

Politicians tend to stimulate the economy in the year before an election, he said, and there is a slowdown in growth the following year. He expects slightly less growth in 2005, to just over 3 percent real GDP.

Mike Moran, chief economist at Daiwa Securities America, forecasts slightly slower growth for the fourth quarter and he expects long-term interest rates to move upward.

We can tolerate higher oil prices in our economy, he said. The nation is more energy efficient - 45 percent more energy efficient than the first oil shock in the 1970s, stated Moran.

High oil prices will have a much smaller influence on the economy, but "it will present a challenge," he admitted. A University of Michigan survey indicates that energy prices are starting to weigh on consumers.

There have been five consecutive quarters of growth in business capital spending, he noted. New orders for capital goods are on an upward trend.

Some people may be wondering why the Federal Reserve is raising interest rates now since the economy is not vigorous. The Fed wants to make sure inflation stays in check and does not get out of control, Moran said. It would like to maintain a "neutral monetary policy." According to the views of Federal Reserve members, this is a 2.5 to 3.5 percent Fed funds rate.

Some Regions Still Struggling

Mark Zandi, chief economist and co-founder of Economy.com, commented that the U.S. economy is on the mend, but job growth has been disappointing. There are "big parts of the country that are still struggling," he said. We're going to see an improvement in hiring, but businesses are still reluctant and still hesitant to move.

Regarding growth, the West and South are rebounding, but the Midwest and Northeast are lagging, Zandi said. Western states are seeing the strongest growth. The industrial Midwest, in particular, is struggling.

Some of the strongest metro area job and housing markets include "defense-driven economies," where defense-related companies are located and government spending is strong, he said. These cities include Sacramento, Calif.; San Diego; Phoenix; Tucson, Ariz.; San Antonio; Oklahoma City; Orlando and Jacksonville, Fla.; Charleston, S.C.; Norfolk, Va.; Washington; and Baltimore.

Other metro growth areas include "gateway economies," with links to the rest of the world from trade and foreign in-vestment, and "tech-driven economies." These cities include Seattle; San Francisco; San Jose, Calif.; Los Angeles; Dallas; Houston; Miami and Fort Lauderdale, Fla.; New York; and Boston.

Long-term interest rates are going to rise, said Zandi. "All those sectors of the economy that have been feasting on low interest rates are going to have to adjust." This includes the housing industry.

Zandi believes some markets are significantly overdone in housing. These areas include California, southern Florida, and selected cities in the Northeast.

Stanley Duobinis, president of Crystal Ball Economics, pointed out that job growth helps lead to housing growth. But job growth has been very slow on a national basis. We're behind where we were at the last employment peak, stated Duobinis. However, there are 18 states that are ahead in employment, in some cases well ahead of where they were at pre-recession levels.

For 2003-2004, it has been a very good year for single-family housing starts, he said. Multifamily housing starts have been much more variable across the country, weak in some areas while strong in others.

For 2004-2005, most states are expected to see a decline in single-family housing starts. Two of the biggest housing markets, California and Florida, are projected to see 8-percent drops.

However, he noted that both of these states have "had such incredibly strong starts activity, it would be nearly impossible to keep up that kind of growth." For multifamily housing, the strongest growth is seen through the middle of the country.

Looking at starts per capita, Nevada or "the state of Las Vegas" is the most intense building area, Duobinis said. It's the "bulldozer capital."

Remodeling Trends

Kermit Baker, a senior research fellow at Harvard University's Joint Center for Housing Studies, discussed remodeling trends and the future outlook.

"Remodeling is a big industry, closing in on a quarter trillion dollars [in spending] in 2003," he said.

It has increased by more than 50 percent since 1953. Growth has been averaging just over 3 percent in real terms. Homeowner improvements and maintenance/repairs account for approximately 75 percent of spending. Rental improvements are more cyclical, but it has been on the upswing recently, said Baker.

According to the Joint Center, homeowner spending on systems/equipment totaled $15.4 billion in 2003. This includes electrical, plumbing, and HVAC.

Baby boomers dominate the remodeling market. They represented 43 percent of household share and 52 percent of dollar share in 2003, Baker related. Hispanics are leading the surge in home improvement spending. Their spending has doubled since the mid-1990s, he said.

About half of homes have had significant improvements during the past decade. Only 10 percent of homeowners report no improvements, said Baker.

He concluded by remarking that recent trends point to a healthy remodeling growth rate of about 5 percent annually.

Publication date: 11/22/2004