Coming Off a Housing High Digging a little deeper into some more specific categories, it appears that many areas of the housing market will remain healthy though, again, not as strong as the past two years. And while little was said during the conference call about remodeling, what did come out was very encouraging. Seiders suggested that along with manufactured homes, remodeling would “buck the overall weakening tide that I see in other components in the housing sector.” He continued: “I expect to see ongoing real growth in the remodeling market supported partly by the immense amount of equity that homeowners have in their hands.”
Appreciation. With housing bubbles floating around all over the country, appreciation on house prices has been staggering in some areas over the past two years. Lereah said he actually prefers the imagery of hot-air balloons to bubbles, with air flowing in and out rather than popping. He suggested that many of those balloons — which were responsible for 13% appreciation nationwide —will deflate in 2006, and home prices will appreciate at a more normal rate of just over 6%.
Berson predicted an even larger drop, projecting appreciation to be right around 3% in 2006. But he pointed out that even this has a silver lining: At this modest rate, appreciation is more in line with income growth than in times of larger appreciation, making home-ownership more affordable — a definite plus for remodeling.
Housing starts. The consensus from the panel was that housing starts will drop between 6% and 8% in 2006. While this seems to be a significant decline, Seiders notes that such a decrease would simply be “retracing” the growth seen in 2005, and reverting back to the rate of 1.9 million seen in 2004.
Home sales. Similarly, the panel by and large agreed (Berson’s 8% projected decrease was a bit more severe than the rest) that new home sales would drop back to the 2004 level of 1.2 million.
Meanwhile, after a third straight record year, the Homeowner-ship Alliance panel of economists seemed to agree on a 4% or 5% decrease in existing home sales in 2006, although Berson’s projection was once again more pessimistic at a drop of 8%. However, that would again mean approximately reverting back to the 2004 level of 6.8 million, which is, don’t forget, the second-highest year on record.
Research has shown that three-quarters of homeowners undertake some home improvements very shortly after buying their house, making home sales important to a healthy remodeling market. While the projected decreases in sales of both new and existing homes look alarming at first glance, the fact that they would simply be back at 2004 levels should be comforting. That was the year, after all, that the remodeling market truly took off.
Mortgage rates. Lereah and Merski predicted that 30-year fixed mortgage rates, which stood at 6.21% in early January, according to Freddie Mac, would rise to 6.6% or slightly higher by the end of 2006. Lereah sees this rather modest increase as something of a blessing. “To me, it means a soft landing for housing, and just a temporary landing,” he said during the conference call. Contacted later, Lereah explained further: “A sharp rise [in interest rates] would probably help housing by reducing demand for homes substantially.”
Cash-out refis. Nothaft, vice president and chief economist at Freddie Mac, says his prediction for mortgage rates is that they’ll rise gradually, eventually averaging 6.5% for the fourth quarter. Because of this expected increase in mortgage rates, “I do think there will be less home equity converted into cash,” Nothaft says. “That may translate into a little less activity for remodeling.” Indeed, if you’re going to worry about anything in the economy, cash-out refis are your ticket.
The panel wasn’t particularly upbeat on the prospects of cash-out refinancing heading into 2006, with Nothaft suggesting that the amount of activity could fall to half of the 2005 level. This is troublesome because of the large role cash-out refis played in the remodeling boom of the last two years; with mortgage rates so low, homeowners had been using the equity they had in their homes to complete remodeling projects and increase their home value even more.
As you can see, there’s not much to worry about. Try to remember that the next time someone — even us — tells you that the sky is falling.