More Good News

How long can the housing market boom continue? At least through 2005, those surveyed predict, with a positive future predicted all around. The prevailing belief among economists and kitchen and bath industry experts is that the strong financial performance of 2004 suggests more good times are on the way.

Interestingly, at the end of last year, most economists were only cautiously optimistic about 2004, yet those predictions have turned out to be overly conservative.

"I expected a slight decline in the housing starts [and] home sales [in 2004], and a higher interest rate structure than we got," says David Seiders, chief economist for the National Association of Home Builders (NAHB), in Washington, DC. "The long term rates turned out to be significantly below where I thought they would be in 2004. That was a major change in the expected environment in housing. So instead of the numbers receding, nearly everything is up."

"The year 2003 was a record one [and] we expected some softening from those figures," adds Lawrence Yun, senior economist with the National Association of Realtors (NAR), in Washington, DC. "We thought the mortgage rate would be rising. The [Federal] Reserve was going to raise its short-term interest rate, but that did not pan out. The 30-year mortgage rate stubbornly refused to move up, and has remained at very attractive levels throughout the year. It has pushed home sales to another new record in 2004. We had 6.1 million existing home sales in 2003, and we anticipate 6.5 in [2004]."

Interest rates "just continued to fuel the market," confirms Randy Giggard, manager, research services group, FMI Corp., in Raleigh, NC. "[2004] year end, the total housing market is probably going to end up 11% ahead of last year's record pace. Single family housing, we think, will be up about 12%." Yun cites new home sales as 1.1 million in 2003, and projects 1.2 in 2004. He credits the creation of new jobs for bringing in a new set of buyers.

"The year 2004 was better than expected for cabinet manufacturers," says Dick Titus, executive v.p. for the Reston, VA-based Kitchen Cabinet Manufacturers Association (KCMA). "The demand for industry products remained strong throughout the year."

Continued Growth

What does all of this mean for 2005? The consensus seems to call for semi-cautious optimism. Baker forecasts "good, not great growth" for the economy overall. "We've seen a solid recovery in 2004," he elaborates. "There are still some issues the economy needs to deal with, which is why we're not going to see a tremendous boom continuing. I'm guessing [we'll see] growth in the 3-1/2% range, a little bit above average, but not really [an] expansion phase."

"We are coming out of the recession and slow recovery," echoes Yun. He sees the economy's momentum carrying over to 2005, generating "close to 2 million jobs in 2005, so that is positive in terms of economic outlook."

"Our forecast for 2005 is very much like we had for 2004," says Giggard, "just pushed out a year, for a lot of the same reasons." He foresees "interest rates creeping up a little bit and housing finally cooling off a little bit" while continuing immigration and echo boomers who are now getting into their 20s and need apartments helping buoy the sagging multi-family segment.

Baker predicts housing overall "is going to be a little weaker, probably down about 5%, maybe 10%, from 2004 levels. That would take starts down to the 1.8 [million] range." Similarly, Seiders believes "it's possible we'll finally see some fade of the housing numbers. I've got our home sales and housing starts numbers on the order of 4% to 5% in 2005, coming off record [figures in those areas]."

Remodeling, however, is less dependent on interest rates, and Baker expects to see "growth in that market in the 6-8% range in 2005, just because the demographics are moving ahead." Additionally, lower- and middle-class households that didn't do much remodeling in the last few years ("it was mostly an upper-end activity," notes Baker) will be "driven more by economic fundamentals, job growth, income growth. It's not going to be the $150,000 kitchen remodel, [but rather] the nuts and bolts, replacement projects, and more modest $10,000-$20,000 remodels."

"The remodeling segment will probably outperform the overall housing market," agrees Yun. "Even though we anticipate some slowdown in sales activity, I really don't anticipate any slowing in the remodeling.

The typical American home is getting older, [and] requiring more remodeling expenditure. Second, we have very active immigrant home buyers, and

the homes are not really configured to the household they're accustomed to: typically, immigrants are larger households, maybe inter-generational households. Sometimes they like to readjust existing homes to accommodate [extra bedrooms and bathrooms]."

As for mortgage rates, Seiders estimates mortgage rates at around 6-3/4% in the current forecast. "The Federal Reserve will continue to do its rate hikes," predicts Yun, "and consequently we anticipate the mortgage rates to be 6.5% [up from a 5.9% average in 2004]. The short-term adjustable rates will make even a larger increase, from 3.9% in 2004 to 4.8% in 2005. Higher interest rates will pull back some of the exuberant demand that we are seeing. We anticipate the home sales to decline roughly 4% to 5%."

Giggard points out that slightly higher mortgage rates "are not necessarily a bad thing. As long as it happens in a controlled, measured way, gradually and moderately, people can adjust to that it's a sign that the economy is improving, and people have jobs." He forecasts mortgage rates around 6-1/2% in 2005.

"While rates may climb slightly in 2005 and get close to 6.5%, these rates remain very favorable," adds Mary Busey Harris, executive v.p. for National Association of the Remodeling Industry (NARI), in Des Plaines, IL. "These conditions continue to remain superlative for the remodeling industry."

Can anything throw a wrench into this overall rosy outlook? "The biggest risk would be a major terrorist attack on U.S. soil," thinks Yun. "That would really dampen consumer and business confidence."

Most think the war in Iraq is not a major factor, however. "I don't think people have looked at the war in Iraq and said, 'oh, I can't buy a house now,'" quips Giggard. "I think it's been the opposite, because [the war] has held down and the economy and the interest rates." Economists do note, however, that the war is contributing to the lumber shortage, as did the aftermath of Florida's hurricane season. In some ways, a turbulent world scene only helps the housing market. "As long as this war remains in Iraq and our economy continues to grow, Americans will continue to foster and enjoy a constantly improving, home-centric lifestyle," notes Harris.

"The fact that military spending increased greatly, that helped the economy in the short term," adds Yun. "But the negative side of that is, the additional spending is just coming from government borrowing. So far, it has not had noticeable impact on the interest rate, but it could become alarming if the budget deficit is not under control."

"One thing [the war] has done is driven up the Federal government budget deficit," agrees Baker. "Ultimately, that's going to show up in mortgage rates, borrowing rates. It does have the potential to add a lot more pressure to mortgage rates, if that much deficit isn't resolved soon."

"I think [real] risks are connected to two things the world oil market and the dollar," opines Seiders. "I assume in our forecast that we have passed the peaks in world oil prices, and they will be rattling on balance downward throughout 2005. If that turns out to be wrong, if something goes completely haywire in the oil markets, whether it's the Middle East or some other part of the world, then you have to rewrite the script. And, you could have serious damage to the U.S. economy from that enough to damage the housing market, even though that scenario would involve a lower rate structure than I have in our base line.

"The other nagging thing is the dollar," Seiders continues. "I am counting on the further decline of the dollar to help revive our export market, and to the trade balance to cease being a big drag on GDP growth. It's a funny thing to be trying to get a lower dollar at the same time the Fed is raising interest rates, because ordinarily that's not the right combination. But that's what the Fed wants. It's been trying to talk the dollar down at the same time it's raising the rates. I'm counting on an orderly, moderate further decline of the dollar that will revive the trade sector. Some people worry about the dollar going into a disorderly decline. That would be a problem because the Fed would be compelled to defend it with higher interest rates, and that would be a bad combination for the housing sector."

Barring such unexpected events, however, 2005 should keep all segments of the housing industry building and remodeling away.

Stock Market Influence

In previous years, a turbulent stock market had proven to

be a plus for the housing market, as homeowners chose to invest in their homes instead. But the better numbers the stock market is showing currently don't indicate the reverse. Instead, "that is providing some additional wealth for people to use to buy or upgrade their homes," thinks Yun.

The general economy has "sputtered to recovery," says Giggard. "But [it] wasn't as strong as we'd have thought a year, a year and a half ago."

That's not to say, however, that gains weren't made. "The overall job market has done quite well," says Seiders. "Certainly construction employment has been quite good. And that's a major factor in housing demand." But it was the lure of low interest rates to first-time home buyers that really kept the market in gear.

Taking the Plunge

First-time buyers of starter homes are the primary driving force of current home sales, those surveyed agree. "It is interesting to note that four of 10 property sales are first-time home buyers," says

Harris. "These sales are fueling the housing market and enabling others to trade up or trade down."

Minority, immigrant and "echo boomer" households are the demographic center of this trend. "A lot of the growth we're seeing in single home sales and construction are minority households," notes Baker. "I think that's what's kept the home-buying numbers strong."

Additionally, immigrants who have been in the U.S. for five to seven years are now ready to buy their first homes. "The housing market is benefiting now from strong immigration rates five [to] 10 years ago," Baker explains. "And that's going to continue in the near future. In this post-9/11 world, you certainly could imagine greater restrictions in immigration, and some of those numbers tend to fall off in the long run. You still have to see that as a possible scenario on the horizon. That would impact where the market is headed in the next five or ten years."

Currently, immigrant home buyers are most likely to be from Mexico and Latin America, China, India and Korea, according to Yun.

First-time buyers are also likely to be younger than in previous decades, Yun adds. "The under-35 age group has traditionally always had a home ownership rate under 40%," he explains. "In the most recent data, [it's] 43.1%."

Two factors contribute to this trend. Baby boomer parents

have the largest wealth accumulation in history, and often help the echo boomer generation with the down payment. Additionally, low interest rates help marginal first-time buyers qualify for loans.

Remodeling Boom

While many home buyers are moving into their first house, others are choosing to stay where they are, but improve. "The remodeling market has been very, very strong, showing real growth," declares Seiders. "The focus on remodeling and home improvement continues to be very favorable, with no indication of abatement in the upcoming year," agrees Harris.

She cites slim housing inventories in metro areas as one reason why many homeowners choose to remodel and improve their properties. "Land availability is a big issue," confirms Giggard. "In a lot of markets, the people that currently own a home that's maybe 40-50 years old [are located] maybe 20 or 30 miles out of the city they have an easy commute. [And] they have a choice of remodeling that home, or moving 60 miles out to build what they want to build. So we see a lot of people [choosing] to remodel rather than uprooting their families and leaving their communities."

Giggard points out that remodeling also tends to follow new home sales. Thus, "the big run in homes in the 1990s, those homes are in line to get remodeled."

Who's doing the remodeling? Baby boomers. "They are the most affluent generation we've ever seen, and they like to spend the money," says Giggard.

"Baby boomers [ages] 46-64 account for just over half of all spending on remodeling," echoes Baker. He expects this trend to continue strongly for the next decade, as the younger end of the boomer generation gets ready to make the empty nest into the palatial dream home. Similarly, Titus expects the remodeling market to continue as the major marketing segment for cabinet manufacturers.

Baker emphasizes that while the spending will continue as the boomers age, the type of spending will change somewhat. Projects might change from "working on space-oriented projects room additions, finishing interior space, adding to space in the home to investing in upscale finishes and appliances. [Then] the next wave is going to be accessibility, aging-in-place concerns: How can I adapt my house to meet my needs as I move into my sixties and seventies?" The emphasis will be on products that make the house easier to get around in, to promote health and support a household that may be slowing down a bit.

Unlike previous generations, however, these boomers will not be buying any rocking chairs. Rather, the focus will be on wellness, with such amenities as home spas and exercise equipment, as well as subtle modes of assistance. For instance, home elevators are emerging as the next must-have addition to age-in-place homes, as boomers choose to save the wear and tear on their knees for their bi-weekly tennis game or bicycling excursion. However, the elevator is perceived as a luxury item, eliminating the "look, I'm old" vibe of stair lifts. KBDN

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