Economy FRONT LINES: Economy
BY DAVID LEREAH
Time for other sectors to rise
After five years of being the primary engine for economic growth in the United States, the housing sector is likely to move to the back burner and could actually contribute to a slowing in economic activity this year.
Some economists are predicting GDP growth to slow to between 2.75 percent and 3.5 percent, a sizable drop from the 4.1 percent posted in the third quarter of last year. My own forecast is somewhat rosier, with growth slowing only slightly, to about 4 percent. But, in either case, housing will factor into the easing as mortgage rates continue inching up, price appreciation moderates, and the real estate sector shrinks to accommodate this new reality.
I’m predicting 30-year mortgage rates will trend up modestly toward 6.7 percent by year’s end from 6.3 percent at the start of 2006, placing upward pressure on purchasing costs.
Home sales and housing starts should drop correspondingly, by about 5 percent and 8 percent, respectively. The cooling won’t be felt just in reduced transactions; it’ll also be felt in a drop in real estate–related jobs, which will contribute to slower GDP growth.
Home price appreciation, which I expect to ease on a national basis to 6 percent from 13 percent last year, has been long expected and is healthy for the industry. But it will nevertheless come with two negative effects on economic growth: Consumers will have less equity to tap through their equity lines of credit, and they’ll feel less wealthy based on their unrealized gain, both of which will inhibit their spending.
To be sure, housing isn’t the only potential economic drag. Energy prices could remain stubbornly high, exerting upward pressure on the cost of producing goods and services, and Wall Street investors could scale back their activity until their comfort level with new Federal Reserve Chairman Ben Bernanke increases.
On the plus side, strong demand for U.S. exports is expected due to stronger growth in overseas economies, and overall business spending should also continue to be strong. What’s more, construction activity for the rebuilding of the hurricane-hit Gulf Coast promises to boost GDP growth.
So, even with the modest slowing in housing sales expected, the economy promises to provide a favorable backdrop for businesses and consumers, and that ultimately helps housing.
Lereah is senior vice president and chief economist for the NATIONAL ASSOCIATION OF REALTORS®.
Xers
Spending on home remodeling correlates closely with age, with household heads aged 40–49 spending the most. That bodes well for you, since Gen Xers are just now reaching their 40s and tend toward higher home ownership rates than boomers did at the same age. Your opportunity? Position yourself as a resource for finding qualified remodelers, material suppliers, and data on the value of remodeling.
| Average annual remodeling expenditure |
| | Do-it-yourself | Professional |
| Echo Boom (Born 1975–1985) | $602 | $587 |
| Gen X (1965–1974) | $922 | $1,318 |
| Trailing Baby Boom (1955–1964) | $643 | $1,686 |
| Leading Baby Boom (1945–1954) | $463 | $1,588 |
| Matures (1935–1944) | $285 | $1,400 |
| Seniors (Before 1935) | $123 | $986 |
| Source: “Understanding Generational Differences in Home Remodeling Behavior,” Joint Center for Housing Studies, Harvard University, 2005 |
Business Confidence
Solid buyer traffic. Although sales are easing as interest rates tick up, practitioners believe home sales will stay robust in the months ahead. Expectations are for strong buyer traffic in particular. Practitioner confidence was surveyed in January and looks ahead six months.
Results are based on 470 responses to 3,000 surveys sent to large and small real estate offices. The survey asks practitioners to indicate whether conditions are strong (100 points), moderate (50), or weak (0). Responses are averaged to derive results.
Home Sales
Fifth annual record set. Existing-home sales declined in December but easily carried the year to an annual record. Sales of single-family homes, townhomes, condominiums, and co-ops were down 5.7 percent to a seasonally adjusted annual rate of 6.6 million units in December, from a pace of 7 million* in November.
*Revised from a figure reported in the February issue.
February 1 Pending Home Sales Index: 116.4 The PHSI, based on signed contracts for existing homes, is an indicator of home sales expected to close over the following two months. An index of 100 is equal to the average level of contract activity during 2001, the benchmark year.
Find current economic data at REALTOR.org/research.
