Volume 7, Issue 11 - December 2006

No Need to Buckle Up

Experts Say Housing Market to Land Softly 
by Tara Taffera

When McGraw-Hill Construction hosted its annual Outlook 2007 Executive Con-ference October 27, in Washington, D.C., the conference’s six speakers agreed that the landing for the housing industry will be a soft one—but not without challenges.
Many speakers pointed out that the astounding home prices in the United States also can be found around the world. 

“Home prices are up 70 percent since 1997. That is average compared to the rest of the world,” said David A. Wyss, chief economist for Standard & Poor’s, who presented an economic outlook. “In other countries, prices are cooling off and it’s not a disaster.”

He said the housing market peaked last summer but points out that it is stalling rather than plunging. And, while many lament high homes prices, Wyss said housing remains affordable due to low mortgage rates. Though he does add that the ratio of home price to income is at a record high. But rather than a national bubble, he said there are only local bubbles in areas such as New York, California, Boston and Florida.

Other economic high points: oil prices are coming down from record highs, restoring some purchasing power; and the stock market will recover but slowly.

“The bottom line is that the economy recovers, but slowly,” he said. 

World Economic Outlook
Nariman Behravesh, chief economist for Global Insight, started off his presentation concerning the world economic outlook in a positive light. “We’re in a pretty good period—not just for the United States but for the global economy.”

He said the world’s economic expansion will continue as there has been very strong growth this year. “Every region has done better than the previous period,” said Behravesh.

He noted that developed economies have been able to shrug off terrorist attacks, thanks to large diversified economies.
 “Perhaps the most notable trend of the last few years has been the resilience of the world economy in the face of multiple shocks.”

But he said the big story is the commodity boom. “This is the tide that has lifted all boats.”

He noted that long-term interest rates remain low and said this is what has driven up home prices. Like Wyss, he pointed out that this is not a U.S. phenomenon.

“To blame the Fed for a ‘housing bubble’ misses the mark by a long shot,” said Behravesh. 

“To us, the biggest problem is that there isn’t enough independent growth (consumer spending) outside the United States,” he adds. “So as the U.S. slows that’s trouble for other regions who export to the United States.”

Talk of exports and international growth is incomplete without talking about China. But Behravesh is quick to point out that Chinese growth statistics are very unreliable. “Our best guess is that China is growing about 13 percent a year.”

He also mentioned the risk of a hard landing in China. But says that if this happens, “Canada would be hurt, not the United States because oil prices will go down.”

When talking about world growth he showed a chart (see chart top right) showing world GDP growth contributions.
“That’s the problem. 30 percent only contribute to 15 percent of growth,” he said. 

But the global outlook is strong. 
“Financially, the emerging markets are much stronger than ten years ago. They are not as vulnerable to external finance but they are vulnerable to external demand,” he said.

Regarding oil prices he said that though prices have come down, capacity is still limited and markets remain tight. “There is no shortage of oil but producers aren’t investing. By definition we will never run out of oil.”

While many economic forecasters are alarmed by low saving rates in the United States, Behravesh said this doesn’t mean a full crisis is ahead.

“We are the engine of growth. Period.”

Trends in Home 
Building and Remodeling
The engine driving the housing market is cooling off somewhat. Kermit Baker, AIA chief economist, talked about trends in the home building and remodeling industries. 

“I have the distinct challenge of putting a positive spin on what’s happening in the residential housing market,” he said at the outset of his presentation. 

After reaching record levels, home building has slowed significantly (see chart page 29). “But this is still a strong year for the industry overall,” he points out. 

That is due in part to the growth of the remodeling industry, which according to Baker has almost doubled over the past decade (see chart page 29). Forty percent of the market is comprised of remodeling spending while 60 percent is comprised of new construction. 

“We are not reporting a weakness in remodeling. It will soften but it won’t be anywhere as severe as the new construction downturn.”

Baker noted some positives in the long-term housing outlook including strong household growth due to immigrant population, a vibrant second home market due in part to aging baby boomers and a more efficient industry. The negatives include affordability, land-use restrictions and high energy costs. 

He said the long term housing projections are favorable (see chart page 30) with most of the supply to come from traditional single-family housing.

The positives for the long-term remodeling outlook include an aging housing stock (homes built in the 1970s and 1980s are entering their remodeling years), rising land prices/energy costs and high homeowners equity levels. The negatives include a fragmented industry (many small companies with a negative reputation) and aging baby boomers. 

“At 20-25 years homes hit their peak and many things, such as the windows, need to be replaced,” said Baker. “Since World War II homes have been getting bigger but this is now starting to stabilize. It may be that affordability factors are finally kicking in or maybe concerns about energy costs,” he added. 

As non-residential activity accelerates, residential is in the midst of a “major correction.” However, this will still be a relatively mild downturn, according to Baker. 

2007 Construction Outlook 
Robert Murray, vice president of economic affairs for McGraw-Hill Construction, presented the 2007 Outlook for U.S. Construction Activity. He pointed out that single-family housing decreased 11 percent in 2006 (see chart page 30). “When you have a decline of that magnitude obviously it will have an impact.”

He reiterated the message that a soft landing is expected for the U.S economy though long-term rates will creep back up. 
He addressed the Energy Policy Act of 2005, which didn’t have much of an impact. “Our view is that incentives weren’t sufficient enough for people to take action.” 

Murray showed attendees a chart regarding U.S. single-family housing, showing construction falling sharply after a robust 2004 and 2005. 

“Yes, it’s down but it’s returning to levels seen a decade ago (see chart below).”

“The expectation is that remodeling will hold up as well,” he added.

Murray continued, “Relative to the last 15 years the housing market is still healthy—to the last few years—no.” 

Tara Taffera is the editor/publisher of DWM magazine. 


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No reproduction of any type without expressed written permission.