Housing Outlook Good, But No Repeat

The expansion of the U.S. economy that began in April 1991 has become the longest ever in peacetime, far exceeding the four-year average interval between recessions. Unemployment rates, inflation, and interest rates in 1998 were the lowest in a generation. Yet the expansion hasn't shown signs of running out of gas.

Although there is no evidence that a recession is at hand, the recent extraordinary rate of economic growth cannot be sustained. Growth in GDP in 1998 was close to four percent, and the rate of growth in the final quarter of the year was close to six percent. That was way above the rate of growth of the nation's capacity to produce goods and services, which depends on the growth in the labor force and in productivity. The maximum sustainable rate of growth is probably about 2-1/2 percent per year. The higher growth rates of recent years have pushed down the unemployment rate, and it's hard to see how unemployment could go much lower than the 4.3 percent rate reached at the end of 1998.

The biggest threat to continued growth in the U.S. economy has been the economic and financial problems in Asia and elsewhere. So far the turmoil abroad has had a net positive effect on demand for housing and wood products in the U.S. If it weren't for the problems overseas, inflation and interest rates in the U.S. would be higher, and in 1998 the Federal Reserve probably would have raised rather than lowered short-term interest rates. If the problems abroad were to spin further out of control, however, home building, as well as the rest of the U.S. economy, would be in jeopardy. Recent problems in Brazil are a reminder of the ongoing risks.

Just as the recent rate of growth in the overall economy cannot be sustained indefinitely, the level of housing production also cannot be sustained. In 1998, including mobile homes, there were nearly two million new housing units produced. Based on the growth and age structure of the population, the projected increase in the number of households is only about 1.2 million per year. Even taking into account second homes, replacement of units lost to disasters or demolitions, etc., it's not reasonable to assume that production of much more than about 1.7 million total housing units (including about 300,000 mobile homes) can be absorbed in an average year during the next decade.

In 1999, we expect the total number of conventional housing starts to be roughly 1.5 million, or about six percent lower than the 1.6 million in 1998. Both multifamily and single-family starts will decline.

In the year 2000, we expect the rate of growth in real GDP to remain slightly below the long-term sustainable rate of 2-1/2 percent. Although interest rates, inflation rates, unemployment, etc should remain favorable, they won't improve. Similarly, unlike the last few years, there is not likely to be an extra boost in housing demand from stock market gains. The number of conventional housing starts in 2000 should fall below 1.5 million (our forecast is for 1.48 million).

These forecasts don't include a recession. While we don't know when a recession will come, and there are no signs that it will come soon, it would be unwise to assume that the 1990-1991 recession is the last one the U.S. will ever see.

Michael Carliner is vice president for economics at the National Association of Home Builders. He is responsible for economic analysis and forecasting, survey research, and analysis of government policies affecting the housing industry.

Also See From Engineered Wood Journal Spring 1999:

Two Front Challenge

Fire Prevention

Workplace Motivation

Engineered Wood Systems

Stepping into the Same River Twice

Industry Watch Spring 1999