Housing market expected to ease as year progresses

By Kim Kennedy -- Industrial Distribution, 8/1/1998

Thousands of units Annual % change

1997 1998 1999 1997 1998 1999

Total starts 1,474 1,434 1,403 -0.2 -2.7 -2.2

Single Family 1,134 1,114 1,092 -2.4 -1.7 -2.0

Multi-family 340 320 311 7.7 -6.0 -2.8

Billions of $ Annual % change

1997 1998 1999 1997 1998 1999

Residential Construction 185.5 195.3 190.0 3.4 5.3 -2.7

Single Family 162.7 170.4 166.9 2.3 4.7 -2.0

Multi-Family 22.7 24.9 23.0 11.9 9.6 -7.5

Source: U.S. Commerce Dept. Forecast: Cahners Economics

In the first four months of 1998, housing starts have averaged an incredible 1.569 million units on a seasonally adjusted annual basis, 6.4% above their level in the same period of 1997. That's an exceptional track record for a market that has been at its highest level of the decade for over two years. We still think the market will slow as the year progresses, to a total of 1.434 million units. But a closer look at single and multi-family starts suggests that the recent strength could last a few more months before the inevitable slowdown begins to kick in.

Multi-family starts raced out of the gate in the first two months of the year: actual starts were 21% higher than a year earlier in January and 13% higher in February. But gains slowed to just 3.3% in March, and April starts actually fell 20% from their April 1997 level. In the first three months of the year, multi-family starts were 11.3% above their level a year earlier. But the April weakness flattened the market-in the first four months of the year, starts were just 0.1% higher than in the same period a year earlier. On a seasonally adjusted annualized basis, starts averaged 328,000 units in the first four months of 1998. The year's total will reach 320,000 units, 6% below the 1997 level.

By contrast, the gains in single-family starts have been more consistent in 1998, although growth has accelerated since September of last year. In the January-April period, single-family starts increased 7.7% before seasonal adjustment. In the first four months of the year, single-family starts averaged a seasonally adjusted annual rate of 1.240 million units. For 1998 as a whole, single-family starts will total 1.114 million units, down 1.7% from 1997.

The recent declines have some analysts wondering if the long-awaited softening in the marketplace has finally arrived. But because the weakness has been more on the multi-family side, which has a far smaller impact on the overall market, expect several more months of strong housing numbers before a true weakening begins to occur.

A slowdown in home sales is required to bring about the decline in starts. Growth in new home sales has been slowing. But in the first quarter of 1998, sales were still 3.9% above the same 1997 levels. March sales, however, were just 0.6% ahead of a year earlier, which may suggest sales will turn down in the second quarter. If this does occur, it may trigger a decline in starts during the third quarter. Expect new home sales to total 802,000 units in 1998, down 0.7% from last year.

At the same time, existing home sales have, as yet, shown no sign of abatement. In the first four months of 1998, existing home sales grew 15% above their level a year earlier. I