Evans On The Economy -- High On Housing

The boom is not going bust, and that will work to your benefit.

The housing sector defied the weak U.S. economy last year. Single-family housing starts rose to 1.32 million, the highest since 1978, while total starts rose to 1.73 million, the highest since 1986. This year, I think housing starts will remain near that level, totaling 1.7 million, even though the consensus calls for a substantial decline. Also, I think the average housing price will rise about 4% this year -- fairly decent compared with a rate of inflation that will be under 3% -- although a lot less than the 7.5% gain last year. Articles announcing the imminent demise of the housing industry started appearing as early as last July. Yet during the second half of last year, housing starts actually improved, averaging 1.75 million at annual rates, up from 1.70 million in the first half. Furthermore, housing prices kept rising, although at a more muted rate. How long will housing starts -- and sales -- keep rising? That's easy. As long as interest rates remain at current low levels. And how long will that be? Now there's a more difficult question to answer. So I'll just say this: longer than you think. That's good news for manufacturing executives. New houses need wood and shingles and brick and sheet rock. They need appliances and furniture and door chimes and mailboxes. And as a Saturday drive to your nearest building supply or home improvement center makes clear, American homeowners remain intent on adding to what they already have. And that adds to demand. But wait, there's more good news for manufacturing executives who are homeowners. The way I look at things, in a U.S. economy that is likely to continue to limp along at a subpar growth rate, your house is a pretty good investment. I don't know where the stock market will be on any specific day, and neither does anyone else. I will say, however, that over the next several years, the stock market will rise only about 5% per year. Even after the recent massive decline, the S&P 500 is currently trading at a fairly lofty P/E of 19, and interest rates are the lowest they have been in 40 years. The federal budget deficit will get a lot worse before it gets any better. And over the long run, corporate profits don't really grow any faster than nominal GDP, which I think will grow at a 5% rate -- 3% real growth and 2% inflation -- for many years. CEOs and CFOs may continue to lie about how fast their profits are growing, but I strongly suspect investors are sick and tired of that nonsense and will throw those estimates right into the circular file where they belong. Thus if you own your house, it will continue to be a better investment than the stock market. Meanwhile, you get the enjoyment of living there. Of course, you get the heartache of occasionally opening the plumber's bill and of paying for a new roof. But at least you don't get a margin call. For most families, a bigger, nicer home in a better neighborhood will continue to make more sense than sending your money to your broker, who, we all know by now, is someone who invests your money until it's all gone. So until interest rates start rising -- which I think is at least one and probably two years away -- housing will continue to be the brightest sector in the economy, and the best investment for most families. Michael K. Evans is chief economist for American Economics Group, Washington, D.C., and president of the Evans Group, an economics consulting firm in Boca Raton, Fla.

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