HOUSTON - New-home construction boomed last year, but interest rate hikes and a slowing economy will take their toll in 1995, as housing starts will decline by 5.6 percent in 1995 and by another 6 percent in 1996, according to David Seiders, chief economist for the National Association of Home Builders. Meanwhile, spending on remodeling, a key market for plastic building products, grew by 7.2 percent and should keep on growing at an average rate of 6.6 percent a year, through the rest of the decade, according to NAHB.
Seiders, speaking at NAHB's Builders' Show, advised caution for builders as the Federal Reserve Board seeks to bring the U.S. economy down for a soft landing.
The NAHB-sponsored Builders' Show was held Jan. 27-30 at the Houston Astrodome.
Since February 1994, the Fed has increased interest rates six times. Mortgage rates climbed from about 7 percent to more than 9 percent - without weakening home construction. Seiders thinks the Fed may ratchet up rates another 1 percent and then stop.
Fed Chairman Alan Greenspan, addressing the Houston convention Jan. 28, defended the rate hikes as a way to achieve a stable economy with low inflation.
``A boom and bust cycle is not a friend to the construction industry,'' Greenspan said.
Seiders, who met privately with Greenspan in Houston, said he agrees with the goal, but ``we worry about potential Fed overkill.''
``I've been suggesting to the builders that, at this time, to really be careful in the markets. We're seeing rather substantial upswing in unsold new-home inventories,'' Seiders said.
In the United States, construction is the second-largest consumer of plastics, behind packaging.
Vinyl windows, siding and pipe are tied directly to construction and remodeling demand; however, activity in the building sector also ripples down to other plastic products, as home buyers purchase appliances and furniture.
The tone at this year's Builders' Show, which drew some 70,000 people to the Houston Astrodome complex, was markedly different from the 1994 show. A year ago, builders were worried about lumber prices, which had leaped to record highs. But lumber prices have stabilized. Now builders worry about interest rates.
Economists speaking in Houston agreed the U.S. economy is not likely to slip into a recession this year.
In fact, the United States is in the midst of a long, steady expansion similar to the expansion of the 1980s, they said. Consumer confidence remains high, fueled by job growth and income growth.
``The economy's going to slow in 1995 and 1996, but its slowing will be, as we say in the medical profession, benign and we will stop well short of a recession,'' said Stephen Roach, an economist at Morgan Stanley & Co. Inc. of New York.
``It will be an orderly moderation of the economy,'' Roach said.
Paul Boltz, an economist at T. Row Price Associates Inc. in Baltimore, defended the Fed's actions to raise interest rates.
``We think the Federal Reserve will tighten aggressively,'' he said.
``Basically, what they're trying to do is to avoid the acceleration of inflation cycles in the United States. They would like to avoid that. Why? Because they want a long business cycle, not a short one.''
After 1991, when housing starts hit the lowest level since the end of World War II, overall starts rebounded strongly through 1994, when they reached 1.45 million starts. NAHB predicts overall starts will decline 5.6 percent, to 1.37 million units, in 1995. The decline will come in single-family homes, which NAHB thinks will drop to 1.01 million in 1995.
Multifamily construction, hammered by overbuilding in the 1980s, will show an 8.5 percent gain this year.
Higher interest rates could actually help remodeling, as some homeowners with relatively low-rate mortgages will opt to stay put rather than buy a move-up home.
Spending on remodeling hit $116.1 billion in 1994, an increase of 7.2 percent from the 1993 figure of $108.3 billion. NAHB economists predict a 6.7 percent hike in 1995, to $123.9 billion.
``As we project through the end of this century, we anticipate $170 billion to $175 billion dollars a year,'' said Jim Quinly, a Kansas City, Mo., remodeler.
Quinly has traveled through the country as 1994 chairman of the NAHB Remodelers Council.
``Without exception, in every city I visited I heard that business is good,'' he said.