The supply-demand balance in housing markets obviously has changed dramatically since mid-2005, and further increases in mortgage interest rates are bound to take an additional toll on the demand for single-family homes and condo units. I’m also looking for a modest slowdown in job and income growth later this year and in 2007 as the Fed guides the economy onto a more sustainable growth path, and that’s another negative for demand.
The recent buildup of unsold new single-family homes poses a real threat to the housing market, but a lot of that buildup represents temporary weather-related factors. Thus, I’m still projecting a “soft landing” for the single-family market in 2006, following three years of rapid expansion to unsustainable levels in 2005. Some further erosion is likely in 2007 before the markets stabilize in the latter part of the year.
The condo component of the multifamily market figures to weaken even more than the single-family market, while the rental component may well post an increase following years of erosion. I definitely expect another year of positive real (inflation-adjusted) growth for residential remodeling, supported by a record level of homeowner equity (more than $11 trillion at the end of 2005). Everything included, the residential fixed investment component of GDP should top out in the first quarter of this year and then recede gradually during most of the 2006 - 2007 forecast period.
Although home sales and housing production will be waning, ongoing increases in household wealth generated by positive (albeit slower) rates of house price appreciation will continue to provide solid support to consumer spending. The wealth effect will materialize whether or not housing equity is “withdrawn” via cash-out refis or home equity loans.
