June 18, 2003

By David F. Seiders
NAHB Chief Economist

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Some promising economic signals but no post-war “pop” as yet …
The major geopolitical uncertainties weighing on the economy presumably had receded into the background by the time President Bush announced the end to major military operations in Iraq on May 1, clearing the way for economic fundamentals to shine through the fog. It’s fair to say that accumulating evidence of post-war economic performance contains some promising components, but the eagerly awaited post-war surge is not yet upon us.

Available economic indicators for May and early June suggest that overall economic growth has stabilized at a sub-par pace while the labor market has continued to deteriorate, albeit at a less alarming pace than earlier in the year. Ongoing growth in labor productivity (output per hour) is continuing to generate positive growth in economic output in the face of payroll job losses, but it’s hard to view that pattern with real enthusiasm.

Market “pre-conditions” for an economic rebound have continued to strengthen …
The most promising economic news still is concentrated in fundamental "pre-conditions" for economic expansion. Energy costs have continued to recede from pre-war highs. The stock market has continued to post solid gains (on balance), restoring some wealth to decimated household portfolios and lowering the cost of equity capital for corporate America. At the same time, long-term interest rates have continued to recede to lower and lower records, and quality spreads in corporate bond markets have closed down further. The dollar has continued to gravitate downward on foreign exchange markets, providing support to our trade balance (with a lag) and practically forcing foreign central banks (including the European Central Bank) to cut their interest rates. [return to top]

Economic policy is working hard to stimulate the economy …
There’s already a huge amount of monetary and fiscal policy stimulus in place, keeping the economy from falling back into recession, and more stimulus will be coming on line by the end of June.

The recently passed Jobs and Growth Tax Relief Reconciliation Act of 2003 (the third tax-cut bill for the Bush administration) is heavily front-loaded and should provide substantial stimulus beginning in July as tax withholding is phased down and "advance refunds" of expanded child tax credits begin to hit mail. Furthermore, federal spending will be ramping up as the Department of Defense begins to spend emergency war-time appropriations enacted in March.

On the monetary policy front, it’s now virtually inevitable that the Federal Reserve will cut short-term interest rates at the conclusion of the FOMC meeting on June 25. (NAHB is projecting a quarter-point cut in the federal funds rate target to 1.0%) Indeed, a drumbeat of Fed statements since the last FOMC meeting on May 6 has reinforced deep Fed concerns about potential price deflation in the U.S. as well as the willingness of our central bank to buy more "insurance" against a Japanese-style disaster. At this point, the Fed must cut the short-term rate in order to preserve the decline in long-term rates achieved through its public pronouncements. [return to top]

Rate declines continue to buoy homeownership while draining demand from the rental market …
The stunning declines in the interest rate structure have bestowed benefits on all components of the housing sector by lowering costs for producers, home buyers and owners of rental properties. It’s clear, however, that the greatly enhanced affordability of home buying has provoked a sizeable shift of housing demand toward ownership of single-family and condo units at the expense of market-rate rental accommodations.

The strength of single-family housing certainly has been impressive. Permit issuance and starts of new units both recorded nice increases in May, and a sizeable buildup in the backlog of unused permits (because of unusually wet weather conditions) bodes well for starts in June. Furthermore, NAHB’s Housing Market Index showed substantial strengthening of home-builder sentiment in early June, and the MBA’s weekly index of home mortgage applications climbed to a new record by mid-June; indeed, new records were posted for both home purchase and mortgage refinancings.

Supply-demand imbalances in market-rate rental housing (excluding subsidized low-income rental housing) are starkly evident in climbing vacancy rates for apartment buildings with five or more units and in eroding market absorption rates for newly completed units in such buildings. Starts of new multifamily units have weakened modestly in recent quarters, but the pace of completions has not yet tapered off — pointing toward market imbalances and rent concessions for some time. [return to top]

NAHB’s forecast profiles have been revised a bit …
Recent events and revised policy prospects have provoked some changes to NAHB's forecasts for housing and the economy over the balance of this year and in 2004. We’re still forecasting a nice rebound in economic growth and the job market after mid-year, but the near-term prospects have been trimmed back.

The inflation and interest-rate patterns have been trimmed for the entire forecast period, and the Fed is a more friendly force in this pattern. Housing starts have been boosted a bit in the process, and the single-family share of the total now is higher. Indeed, the 2003 forecast now has single-family starts and home sales above the excellent performance of 2002. [return to top]

Want more economic information? Find it in our publications.
Find more in-depth information in our three economics publications, Home Builders Forecast, Housing Market Statistics and Housing Economics. All are availaible by subscription. 

  • Home Builders Forecast includes analysis of single-family and multifamily residential activities, residential remodeling and the full range of nonresidential construction as well as the macroeconomic factors such as GDP, employment and interest rates that drive construction. If your business depends on reliable estimates of housing starts, construction spending and remodeling activity, Home Builders Forecast is designed to meet your needs.
  • Housing Market Statistics contains an overview of important developments and trends that serves as an executive summary of the current industry situation. It also contains annotated charts depicting movements in key indicators and tables providing monthly, quarterly and annual data for more than 250 variables.
  • Housing Economics is our monthly rigorous overview of the economy, data for more than 100 local markets and in-depth analyses of the niches and nuances of home building markets. Available online or in print, it is written in terms that builders, manufacturers and housing finance professionals can understand and apply to their own businesses.

To learn more or to order any of these three NAHB economic publications, visit the Economics Publications Information section of the NAHB Web site or call 800-223-2665. [return to top]

For more information or to contact us directly, please visit www.NAHB.org l ©2003, National Association of Home Builders