by Kenneth D. Simonson

The housing market in 2002 made forecasters look bad in a way that made them feel good. A year ago, most housing economists were saying 2002 would be a solid year but couldn’t possibly top 2001. Yet both single-family and multi-family residential construction wound up the year with impressive gains. The Census Bureau estimated that the value of single-unit new construction rose by 5% in the first 11 months of 2002 compared to the same period of 2001. Multi-unit construction climbed nearly 10%, and improvements were up by 8%.

As 2003 dawns, the forecast is for partly sunny “weather” for housing. Owner-occupied, single-family housing should have another strong year, if not a record-breaker. Rental housing has a much darker outlook.

The Census Bureau announced in late December that new single-family home sales in November were at an all-time high on a seasonally adjusted annual basis. Census and the National Association of Realtors, which provides similar estimates for existing-home sales, reported sales in the first 11 months were nearly as high as in all 12 months of 2001, the previous record-holder. Meanwhile, inventories of unsold homes were low enough to foretell a continuing construction boom through at least the first few months of 2003.

The factors that propelled single-family construction to new heights are still in place. As of January 2, the rate on new 30-year, fixed-rate mortgages was 5.85%, the lowest rate in four decades, according to housing finance corporation Freddie Mac. Disposable (after tax) personal income rose 0.4% per month from August through November, according to the Commerce Department, a rate that was underwhelming by boom-year standards, but sufficient to outstrip inflation, which was running at only 0.1 to 0.2% per month. The combination of low interest and inflation rates plus growth in incomes is likely to remain in place during 2003. This, in turn, will sustain demand for both new housing and home improvements.

Furthermore, population changes favor a continued strong housing market for years to come. Each year, millions of baby boomers are becoming empty-nesters as their children head off for good, whether to college or the job market. As a result, the parents are finding their houses no longer match their needs and they’re ready to buy another place. An increasing number are also investing in a second home instead of paying room, board, and tuition for kids. Meanwhile, the earliest “baby boom echo” kids are old enough to buy their first home, thanks in part to the availability of mortgages that allow for minimal or even zero down payments.

These trends are good for new housing and also for the rehabilitation, upgrade and retrofit markets. However, they’re not good for rental housing. The ease with which people holding their first job can buy a house means there are fewer people interested in staying in the rental market. In 2003 we’re likely to see a drop in rental housing construction of 5 to 10%, with same-month comparisons worsening as the year progresses.

The market for subsidized or government-funded construction is also likely to weaken. Nearly every state government will be forced to squeeze all types of spending, including rent and construction subsidies, in order to close widening deficits. The federal government, unlike most states, is allowed to run deficits. But a re-ordering of federal spending priorities toward defense and security leaves funding for housing programs vulnerable to steep cuts.

Unlike past recessions, the growth — or lack of it — in construction markets appears to be fairly uniform geographically. The Census Bureau recently announced that from July 2001 to July 2002, the country added 3.1 million residents, and that every state except North Dakota (and the District of Columbia) gained population.

There will be few cost pressures in 2003. Most materials for housing are in plentiful supply and labor markets are soft.

A major area of cost concern, however, is insurance. Employer-provided health insurance, workers’ compensation, builders’ liability and all other lines will continue to rise at double- or even triple-digit rates.

In summary, single-family housing construction and rehabilitation markets should put a nice, warm feeling in many contractors’ wallets in 2003, while multi-family, both private and government-backed, will be much chillier. Wouldn’t it be nice, though, if the markets fool the forecasters on the upside again? n

Kenneth Simonson is the chief economist of the Associated General Contractors of America (AGC), located in
Alexandria, VA. He joined AGC in 2001, but has more than 30 years experience analyzing, advocating, and communicating information on the economy and economic trends. Simonson publishes a weekly e-mail newsletter called “The Data DIGest,” and is co-author of AGC’s new monthly Construction Tax News. He can be reached by phone at 703/837-5313 and by e-mail at
simonsonk@agc.org.