February 2006

Volume 7 Issue 2 February 2006

Industry Indices

Nation’s Strong Housing Market to Simmer in 2006

Following strong growth over the past three years, home sales and housing production will ease back this year to around 2004’s levels, according to economists participating in a teleconference hosted by the National Association of Home Builders (NAHB) on December 20.

Striking an overall positive tone, NAHB chief economist David Seiders and JP Morgan Chase senior economist James Glassman were largely in agreement in their forecasts for the coming year in terms of the outlook for housing and the overall economy.

“We’re looking for a good economy through 2006, with GDP growth remaining strong and with job creation running at roughly the same pace as in 2005-key positive factors in the housing outlook,” said Seiders. “For housing, it will be a systematic simmering down process toward more sustainable levels of sales, production and price appreciation as opposed to a full-blown cyclical contraction.”

Seiders’ forecast envisions overall housing starts reaching 1.94 million units in 2006, which is down from an estimated 2.06 million units this year and very close to 2004’s 1.95 million units. Single-family starts are expected to decline to 1.59 million next year from this year’s 1.71 million units, while sales of new single-family homes will ease to about 1.19 million units from this year’s record-breaking 1.27 million. Likewise, multi-family starts will slip to 350,000 in 2006 from about 354,000 in 2005.

“Multi-family is doing well, with the condo share of the market up to about 50 percent at this point,” Seiders noted. “We think multi-family starts will be pretty stable, with condos losing some market share in the year ahead and the rental side regaining some ground.”

Meanwhile, manufactured or “HUD-code” homes can be expected to see a temporary surge, due in part to orders for affordable housing in areas hit by the 2005 hurricanes.

“The remodeling sector in NAHB’s forecast is also showing persistent positive growth during 2006, partly reflecting hurricane-related expenditures. There’s also a huge amount of home equity available for owners to borrow against for home improvements across the country,” said Seiders.

Glassman’s description of the economic outlook for 2006 is “growth without the steroids.” In other words, he explained, conditions will be relatively good but without the benefit of tax cuts or cuts in interest rates by the Federal Reserve. He too sees core inflation remaining relatively tame in 2006, gauging it at between 1.75 and 2 percent, which is why the Fed should be able to refrain from tightening monetary policy more than once.

Overall, Glassman believes the midpoint of an economic expansion is occurring, and “The next several years should present a good backdrop for growth. It looks to me like a pretty good-if not ‘boomy’-outlook for the housing sector.”