WASHINGTON — Will housing starts be up in 1998 and 1999? Will they be down?
Crystal balls worked overtime Oct. 29 in Washington as top economists tried to predict upcoming trends in the construction industry.
An economic storm in Southeast Asia and the recent seesaw swings of the U.S. and world stock markets clouded most fortune-telling devices at the semi-annual Construction Forecast Conference, sponsored by the National Association of Home Builders.
Even without the added uncertainty, there were almost as many different trends predicted in the construction industry as there were people forecasting them.
NAHB's own chief economist, David Seiders, predicted a slower 1998 followed by a small upswing in housing starts in 1999.
``The housing sector has staged a very good performance so far this year,'' Seiders said, noting his report was written prior to the stock market slide of Oct. 24 and 27. ``Total home sales have been running above the 1996 pace and inventories of unsold new homes have been falling.''
NAHB is projecting 1.45 million housing starts for 1997, down about 2 percent from 1996, Seiders reported.
``We expect an additional decline of about 5 percent in 1998, followed by a small recovery in 1999,'' he told the 250 construction, financial and media representatives.
A slightly different view was taken by Joel Prakken, a founding partner of Macroeconomic Advisers LLC of St. Louis. He predicted single-family housing starts will fall 2 percent in 1998 and another 4 percent in 1999.
``GDP growth will slip below 2 percent next year,'' Prakken said, predicting a drag from the foreign trade sector and a 10 percent drop in the stock market.
``With recent events, I've become increasingly confident with the low numbers we've had,'' Prakken said.
Prakken predicts housing starts will sink to 1.25 million in 1999, substantially lower than the 1.4 million predicted by the NAHB.
But another economist, Joel Popkin of Joel Popkin & Co. of Washington, said there is little room for gloom in economic forecasts.
``People with pessimistic forecasts are overreacting,'' Popkin said. ``The [Federal Reserve Board] will put a growing, strong economy ahead of dealing preemptively with inflation.''
Popkin predicted a lowering of interest rates by the Fed, which could lead to more housing starts.
``Housing has always been interest-rate sensitive,'' he said.
Popkin, who also is senior editor of the Journal of Asian Economics, thinks economic shrinkage in Southeast Asia actually will prop up portions of the U.S. economy.
``A lot of the price developments that should occur there should lower U.S. import prices and help keep U.S. inflation under control,'' Popkin said. ``That should give the Federal Reserve a lot more latitude in setting monetary policy.''
Jonathan Goldfarb, managing director of Merrill Lynch and Co., also presented an optimistic outlook on housing.
``Energetic competition in absence of cost pressures should keep materials pricing restrained,'' Goldfarb said. ``With an inflation rate of 2 percent or less, interest rates could fall considerably lower.''
All the recent economic news ``is conducive to a healthy construction industry,'' Goldfarb said. ``Construction falls with high interest rates or a recession. These are the very situations we seem to be avoiding.''
He predicted housing is going to ``remain on a healthy plateau of between 1.4 (million) and 1.45 million starts'' for the next several years.
But the difficulty of forecasting the economy was put into focus by the conference's timing: just days after the 554-point plummet of the Dow Jones industrial average.
``My economic assumptions and forecasts are somewhat out of date because I submitted them two weeks ago,'' he said.
Even with the turmoil on Wall Street and Hong Kong, Seiders said his forecast for housing holds, ``but at least the downside risks to this forecast have increased.''
``We were sort of assuming the stock market was going to weaken 10 percent sometime,'' he said. ``But we didn't think there was going to be this much of a crisis in Southeast Asia.''
Consumer confidence probably was jarred by the stock collapse, Seiders said.And the net export picture, which ``didn't look so hot to begin with, now looks somewhat worse.''
While a drop in exports and subsequent rise in imports may hurt the U.S. gross domestic product, the construction industry could benefit from a looser Federal Reserve monetary policy and lower material pricing, Seiders said.
``We were assuming the Fed would not tighten,'' he said. ``That risk is now off the table. The [Federal Reserve] Chairman Alan Greenspan as much as said so in his testimony to Congress'' on Oct. 29.
Lower material prices could increase builders' profitability — or at least allow builders room to sell their products aggressively if demand weakens, Seiders said.
``When all is said and done, we may have a somewhat lower GDP, but the housing component may hold up,'' he said.
For others, the shaky markets vindicate long-held assumptions.
``I've been cautionary about housing for a while,'' Prakken said. ``I've made some bad housing forecasts in the last couple of years. Statistical models sometimes make terrible mistakes.''
He said his statistical model of 1994 completely missed the boom in housing starts in 1995 and 1996.
On the demographic side, Prakken said the formation of new households — measured on a five-year cycle — is expected to be lower in this five years than in the past 25 years or in the following 10.
In 1995 and 1996 — the first two years of this five-year cycle — more housing was built than was sustainable demographically, Prakken said.
Another big factor in housing starts are mortgage lending rates, Prakken said. But he noted that steady, low interest rates do not stimulate housing starts as much as continually falling rates do.
``Rates have to keep falling to keep housing starts up,'' he said.
An often-overlooked factor in housing predictions is the amount of wealth generated in the stock market, Prakken said. When the market is doing well, investors generally have more inclination to spend money on things like second homes.
``People transfer wealth in equities to wealth in housing,'' he said, noting that the strong stock market contributed between 80,000 and 100,000 of the housing starts this year.
Statistics provided by Prakken show there were 1.14-1.15 houses per U.S. household in 1997.
But the downturn in the stock market—which Prakken sees as continuing—will lower the contribution of stock wealth to housing starts in upcoming years, he said.
All three factors—demographics, economics and Federal Reserve policy—are combining to drive his statistical model of housing starts down 300,000 by 1999.
``That sounds like a recession,'' Prakken said. ``But I don't think there is going to be a recession.''
Part of the forecaster's prerogative is to change the numbers statistical models spit out, he said.
``The equation on its own shows a really big decline,'' he said. ``But I don't feel comfortable with a forecast that extreme. The equation is warning us to be cautious. If housing starts are going to move anywhere, they are going to go down.''