Hurricane Katrina devastated a lot of the housing stock in the Gulf region
The geographic area that bore the brunt of Katrina normally accounts for a minor share of U.S. housing market activity. Indeed, the Commerce Department reported that, “The metropolitan areas affected most by the hurricane accounted for about 1.1% of U.S. total permit authorizations in 2004 and about 2.4% of the permit activity in the South region.”

Although Katrina put only a small, immediate dent in current U.S. housing market activity, the damage to the existing housing stock was immense and the implications for future production are profound.

The Red Cross disaster assessment (as of Sept. 18) indicated that 416,894 housing units were destroyed (uninhabitable and beyond repair). In addition, nearly 85,000 units suffered “major” damage and 130,000 incurred “minor” damage. Louisiana was hit the hardest, with 348,000 units destroyed and another 43,000 damaged.

The Red Cross estimates that most (99%) of the destroyed dwelling units were single-family detached homes, with only small numbers of apartments and manufactured homes removed from the housing stock. This distribution is questionable, in view of available information on the housing stock before Katrina. In any case, the Red Cross disaster assessments for Katrina are a work in process. And, of course, Hurricane Rita is now storming through the Gulf of Mexico.
 

 
The near-term impact of Katrina on economic growth will be smaller than initially feared
When Katrina hit the Gulf Coast there was the potential for massive damage to the energy extraction, refining and transmission infrastructure in the region as well as to the extensive port facilities along the Louisiana-Mississippi-Alabama coast.

The implications of this scenario were devastating to the economy of the affected region and quite serious to the U.S. economy as well. Some forecasters saw serious risk of a national recession, and many made deep cuts to their economic growth forecasts for the balance of this year and into 2006.

The degree of damage to the energy infrastructure and port facilities has turned out to be much less serious than the worst-case scenarios. As this message came through, energy prices receded to pre-Katrina levels and the interest rate structure gravitated back up to levels prevailing before the storm. While some key economic indicators (including payroll employment growth and industrial production) will take heavy hits in September, the impacts will be temporary, and quarterly growth in U.S. economic output will be well maintained. We’re showing average growth of real gross domestic product (GDP) at 3.4% in the second half of this year, only slightly below the first-half pace. [return to top]
 

 
President Bush launches a massive fiscal response to Katrina
The federal government came under heavy criticism for a slow and inadequate response in the days following Katrina, but the federal response has burgeoned dramatically since then.

About $60 billion in disaster relief already has been requested by President Bush and appropriated by Congress, more than $6 billion in tax relief for Katrina victims now is being crafted on Capitol Hill, and the President is proposing a total hit on the federal budget that could exceed $200 billion.

This kind of fiscal response naturally provides substantial support to the economy, helping to limit shortfalls in economic activity in the final months of this year and providing a good bit of stimulus in 2006. The notion of a strong fiscal response naturally received bipartisan support in Washington, but there’s now a lot of political wrangling about how to pay for the post-Katrina recovery/reconstruction package.

The Administration appears to favor debt financing for most of the package while the Democratic leadership sees the opportunity to roll back or delay some of the Bush tax cuts that were passed in 2003 — particularly those that appear to favor the rich. The President holds most of the cards, of course, and debt financing of this magnitude should have little effect on the interest rate structure. [return to top]
 

 
The Fed hikes short-term rates again despite Katrina and the approach of Rita
The Fed hiked short-term interest rates by another quarter point at the Sept. 20 meeting of the Federal Open Market Committee (FOMC). This was the 11th consecutive quarter-point increase since mid-2004, taking the federal funds rate target from 1% to 3.75% in the process. The bank prime rate now stands at 6.75%

The Fed’s decision was highly controversial, coming shortly after Katrina and while Rita was mounting a charge in the Gulf region. The FOMC decision was not unanimous and it’s clear that a number of the 12 District Federal Reserve Banks would have preferred a pause in the action.

The FOMC statement on Sept. 20 basically said that the negative economic effects of Katrina will not persist for long while the likely boost to energy costs is bound to put upward pressure on core inflation for some time. It’s also likely that the FOMC considered the inevitable stimulative effects of the post-Katrina fiscal package as well as the stubborn strength of the supposedly interest-sensitive housing sector!

Looking ahead, the FOMC statement continued to say that remaining monetary policy “accommodation” can be removed “at a measured pace.” That means the Fed anticipates another quarter-point rate hike at the next FOMC meeting on Nov. 1, unless the economy shows signs of persistent weakness by then. [return to top]
 

 
Long-term rates are whipsawed by the hurricanes but take the Fed’s move in stride
Long-term interest rates firmed up during August, fell sharply after Katrina hit, rose as the economic impacts of Katrina were revised down and held steady as the Fed enacted the increase in short-term rates on Sept. 20. Long rates have receded again as the approach of Rita has renewed concerns about the economy, and the 10-year Treasury yield now stands at 4.18% — a bit below the pre-Katrina level.

We’ve revised our projection of long-term rates downward from the forecast that was in place prior to Katrina. We now expect the 10-year Treasury yield to reach 4.4% by the end of this year and close out 2006 around 5.1%. Long-term home mortgage rates show equivalent changes in our forecast. [return to top]
 

 
Despite current disruptions, the housing market outlook is even brighter than before Katrina
The Administration’s plan to meet post-Katrina housing needs relies heavily on the existing housing stock, temporary housing units and mobile homes. But the huge reconstruction process inevitably will involve production of conventionally built housing units — in the impacted areas and elsewhere.

Experience with previous hurricanes shows that the reconstruction process starts slowly and extends over a long period of time. At this point, we’ve held our forecast of housing starts in 2005 at pre-Katrina levels and made modest upward revisions to our 2006 forecast.

The entire economic and housing forecast definitely is a work in process, including estimates of conditions in construction labor and materials markets. Stay tuned. [return to top]
 

 
Don’t miss NAHB’s Fall Construction Forecast Conference.
See what's on the horizon for the housing industry at the semi-annual gathering of the country's premier economists and finance experts. Get the latest forecasts on housing starts, project budgets and other economic bellwethers at the Fall Construction Forecast Conference on Oct. 19 at the National Housing Center in Washington, D.C. Visit www.nahb.org/conference for more information. [return to top]
 

 
Want to know your state and metro forecasts for 2006?
Anticipate the trends, make better decisions and improve your bottom line. HousingEconomics.com, the online publication from NAHB Economics Group, is your single source for market analysis, forecasts, housing statistics and more. In depth analysis and detailed Excel tables and overviews are available for all the state and metro forecasts.  

HousingEconomics.com combines unique scientific research with practical applications providing insights that are original and useful. This interactive Web site at the executive level provides critical data and information quickly, easily and frequently and includes the following features:

• Home Builders Forecast ― state, metro, non-residential, remodeling, etc.
• Exclusive access to NAHB’s staff of economists
• The Seiders' Report
• Housing Market Statistics — 29 tables including housing starts, home prices, building permits, home sales, value of new construction, etc.
• Housing Activity
• In Depth-Analysis

For more details, visit www.housingeconomics.com. [return to top]
 

 
Give your perspective on the new NAHB economics blog.
Give your economic perspective on NAHB's new economics blog, “Seiders on Housing,” launched earlier this month. "Seiders on Housing" is an informal Internet-based discussion forum dealing with topical economic issues, housing trends, survey research and other topics affecting the housing sector of the economy.

Log onto the blog at http://nahbblog.blogs.com an get direct access to Seiders' expert opinions, projections and responses. [return to top]