Log the housing industry's extraordinary performance in 2005 ahead of 2004. Then put your record books away. Economists' projections for much of the past decade have underestimated home building activity, but most are certain that 2006 will mark a change of pace for the industry.

What's more, builders agree. They're not going so far as to lend credibility to the bubble theories, but they acknowledge that pricing power will diminish in the face of rising interest rates and energy prices, and they know they'll have to work to preserve margins while adjusting for higher materials costs.

Despite these near-certain challenges, 2006 looks to be a strong year for housing. Just how strong, though, will depend on questions that surface during almost every conversation about home building. Here, economists and builders share their thoughts on the hottest topics of the year.

KATRINA, RITA, AND WILMA: THE AFTERMATH Bottom line: The waves from “the three ugly sisters” will ripple through the economy throughout 2006.

The hurricanes hit months ago, but it's still too soon to accurately forecast how rebuilding will take shape. What's sure, though, is that the effort will increase pricing pressure on building materials—the costs of which already jumped in the immediate aftermath of the storms. Frank Nothaft, Freddie Mac's chief economist, estimates increases of 5 percent to 10 percent across all types of building materials.

Many of his peers agree. “Reconstruction efforts throughout the Gulf Coast area will increase demand for all the components of the building industry,” says Richard DeKaser, chief economist for National City Corp. He anticipates delays in getting products, followed by price declines later in the year as companies ramp up their production to meet demand.

NO MORE CHEAP MONEY: Nearly all economists believe after averaging 5.8 percent for three years running—2003, 2004, and 2005—for the first time since the mid-1960s, rates will continue to increase gradually, as seen toward the end of 2005. More buyers are opting for fixed-rate loans as the yield curve between fixed and adjustable rates narrows.
NO MORE CHEAP MONEY: Nearly all economists believe after averaging 5.8 percent for three years running—2003, 2004, and 2005—for the first time since the mid-1960s, rates will continue to increase gradually, as seen toward the end of 2005. More buyers are opting for fixed-rate loans as the yield curve between fixed and adjustable rates narrows.

It might be difficult to believe after the price increases of wood products just after Katrina, but Henry Spelter of the U.S. Forest Service says there's good pricing news ahead. In the short term, lumber prices will come down as companies harvest the 19 billion board feet of timber knocked down in the hurricanes. Longer term, panel prices will stabilize as more than a dozen new OSB plants come on line by 2010.

“Prices will be less volatile, but don't kiss volatility goodbye,” says Spelter, who adds that prices will likely move within a $100 band, rather than the $200 or $300 of recent years.

The hurricanes' effect also will be felt through the year in building materials made from petroleum, including PVC pipe, asphalt shingles, and vinyl siding. In fact, that's the only group of products where Michele Halickman, a building materials analyst at Global Insight, doesn't expect price declines in 2006. She's forecasting a 15 percent price increase in 2006, after an 18 percent jump in 2005.

For other commodities, though, she says, “the worst is over.” Among the winners: steel, which saw prices fall sharply in 2005 as domestic production increased to meet demand. (For more information about other materials, see “Friendly Neighbors?” at right.)

Learn more about markets featured in this article: Washington, DC, Anderson, IN, Columbus, OH.