NOTE TO BUILDERS: YOU CAN'T BREAK industry records every year. That's the wisdom economists are dispensing as the home building industry marches into 2005. The expectation is that home sales and starts will fall just short of the banner numbers achieved this year. Big builders, of course, know well that achievements in the past few years have been unprecedented. Still, in a period when setting records has almost become an annual rite, it's easy to get lulled into the belief that a non-record year is a dull one.
Although economists expect interest rates—“the lifeblood of the single-family housing market,” says NAHB chief economist David Seiders—to creep up in 2005, it's important to put that inevitable rise in perspective: Rates are projected to go up only slightly from what until recently were rock-bottom levels.
“Even with a modest rise in mortgage rates, we still have to go back to the mid-1960s to see comparable rates,” notes David Lereah, chief economist of the National Association of Realtors in Washington, D.C. As a result, the housing market is just easing up, which is actually very good news given the potential for red-hot markets to be followed by correctional cold spells.
Easing Off The Gas Pedal Stanley Duobinis observes that the eventual slowdown in the market is a straightforward matter of mathematics. “It's the housing stock that's growing, and so to have the rate of change [increase]—that is, start growing faster every year—is pretty impossible,” says the president of Crystal Ball Economics in Millersville, Md., and former director of forecasting at the NAHB. “That would be like a constantly accelerating car,” he says. “At some point, you hit at least what appears to be the speed of light.”
What then is the speed of light for the home building industry? According to Duobinis, it's about 1.5 million single-family starts, which he says is “about all we need when you look at the number of households being created every year.”
Frank Nothaft, chief economist at Freddie Mac, is quick to note that 1.7 or 1.8 million starts, “is not a shabby number. In fact, it's the same level we were at in 2002. And for those of us who remember back two years ago, we thought the housing market was booming. It's important to keep that in perspective.”
Nothaft views the industry as settling down to a strong, sustainable level. “I think what's sustainable in the economy longer term—in the next two or three years—is construction on the order of 1.7 or 1.75 million starts per year, and that's pretty much where we have the forecast for 2005 and 2006.”
Favorable Rates At the center of any discussion about where the home building industry is going, of course, are mortgage rates. Doug Duncan, senior vice president and chief economist with the National Mortgage Bankers Association of America, says he believes the 30-year fixed mortgage rate will break the 7 percent barrier—but not until 2006. Sure enough, Seiders (6.8 percent), Nothaft (6.1 percent), Lereah (6.5 percent), and Fannie Mae chief economist David Berson (6.1 percent) all predict interest rates to come in under 7 percent for 2005.