It's the time of the year when economic prognosticators spin their “Wheels of Fortune” (or misfortune) and gaze into their crystal balls (or computer screen representation of a crystal ball) and guess what the construction economy will do in the year 2000.

Two different forecasts for 2000 have come across my desk and each gives a slightly different version of what might happen in the year 2000. FMI Corporation of Raleigh, NC feels that in the year 2000, construction of single-family homes, as usual, will respond quickly and markedly to changing economic conditions. Residential construction, which grew by 9% nationwide in 1999 will remain relatively flat. In dollar terms, residential construction grew by $26 billion in 1999 but is forecast to decline by $0.4 billion in 2000.

Single-family housing is the largest construction category, accounting for 30% of all construction. It is one of the 11 closely-watched Leading Indicators of the economy. The four major drivers of new home construction are housing affordability, consumer confidence, household formation, and unsatisfied demand. In 2000, with interest rates expected to rise, a new housing boom will be less affordable; with business conditions expected to become more unsettled, consumer confidence will wane and behavior will become more cautious. All things considered, according to FMI, new single-family housing starts are projected to be down by about 7% in 2000. Most of the drop will be in the lower end of the housing scale, therefore the actual dollars spent on housing in 2000 will not be off by a matching 7%. The actual level of spending in 2000 will be down only about 1% in current dollars to around $20 billion making the year 2000 the second-best ever year on record for total dollars spent on housing.

The Concrete and Masonry publication OUTLOOK, from The Aberdeen Group, a division of Hanley-Wood, LLC, which in turn is in someway related to VA&A Communications Partners III, stated in their publication that the housing market is gradually slowing. Housing starts are currently about 1.65 million but they are expected to slip below 1.6 million through next summer. They are expected to rebound to close to 1.65 million again by the end of 2000.

Consumer and homebuilder confidence has slipped in the past few months but remains near record high levels. Homebuyers are taking advantage of adjustable rate mortgages in the low 6% range to afford the house they want. This switch initially keeps housing starts at a high level, but gradually weakens economic demand by making fixed-rate refinancing more expensive to borrow. Some of the factors which will help the housing market in 2000 include immigration, income distribution, and a return to normal credit markets. Already 160,000 and soon many more new five year work visas for well-paid, foreign high technology specialists are adding to the housing demand. As with the FMI forecast, Aberdeen's analysis supports a stronger higher-end residential market.

What does this mean for you? None of the forecasters is predicting the long anticipated “bust” in housing but I would glance over my shoulder from time-to-time. Material prices have been on the increase lately which, in my opinion could have an impact on housing starts, in particular (as mentioned in the above forecasts) in the low-end housing market.

If you would like full copies of the reports from Aberdeen or FMI, please contact the CFA at (319) 895-6940.