Real Estate Outlook

by Tom K. Lieser Vice President & Economist Security Pacific National Bank Los Angeles. Ca.

NP# it:[ from election charges and coun terch arges has partially settled, we can begin to see a year ahead in which demand for building materials will not change sufficiently from 1978 to cause significant pressure on prices, either up or down.

With some slackening in housing starts to around 1.75 million, the past year's bottlenecks in building

Story at a Glance

Good total market, pessimism is unwar- ranted... 1.75 million housing starts price increases should hold between 5o/o-1 0o/0. . more remodeling and commercial/industrial business.

material distribution pipelines should mostly disappear.

Largely because of high timber costs resulting from federal govern- ment policies, plus labor and energy costs, any price increases should hold between 5%r and l0o[. Our goal is to follow the president's guidelines.

ln general, it now looks like basic worries concerning higher interest rates and growing inflation should be largely behind us around midyear. By the end of 1979 we can expect the inflation rate to have cooled, ending the year at perhaps 60/o or only slightly above. We now see real GNP growth for the year at around 3 to 3ll2o/0. This adds up to a better business year than some pre-elect ion forecasts.

There will be some shifts, not spectacular, within a good total market during the year as we move toward sustained high demand into the 1980s. Remodeling and repairs will continue as a growing part of the market, and commercial/ industrial construction will assume a higher percentage of demand in l979.This will largely counterbi'\,ance the downturn we can expect

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T HE RECENT, sharp increase in I interest rates has raised concern among housing industry analysts about the possibility of a severe slump in homebuilding activity during 1979.

Indeed, our national economic outlook for next year does foresee a pronounced drop in housing starts, from 1978's estimated 2 million units to an expected 1.5 million during 1979, a 25% decline.

However, while the national housing cycle has only recently shown some signs of peaking, residential construction in the Western states, dominated by California, has displayed a moderating trend since the apparent cyclical peak was reached during the fourth quarter of 1977. It is our view. therefore. that the Western states will not see

Story at a Glance

Western residential construction quite favorable compared to past tight money periods. 1.5 mil- lion housing starts in'79. critical variables: interest rates and savings flows.

as sharp a decline in residential building next year as is expected nationally.

The extent to which the pro- jected relatively hieh level of demand for new housing can be met next year will depend importantly on financial variables affecting the supply side of the market.

While the demand for mortgage loans at California lenders remains very strong even at interest rates currently approaching 110/0, there is considerable doubt about the ability of lenders to continue to attract sufficient funds to meet the demand.

While the recent popularity of the six-month T-bill-related savings certificates has helped to stabilize the supply of funds to housing, the rapidly rising rates on these certificates have led to an erosion of earnings that is currently causing some lenders to ponder the wisdom of continuing to convert these funds into mortgage loans.

It is reasonable to expect that some portion of the projected mortgage demand will not be met due to funding limitations, leading to continued pressure on mortgage rates.

One favorable side effect of the expected reduction in construction activity next year should be a lessening ofthe shortages that have plagued the building materials industry during 1978.

Supply shortages and rapid price increases for materials such as lumber, cement, insulation, and aluminum fixtures should abate. The cost of land in urbanized areas should continue to escalate faster than the cost ofconstruction due to increasingly restricted supply. Costs and delays associated with building permit approval in many areas will also contribute to continued increases in the overall cost of building.

In summary, our outlook for residential construction next year, particularly in the Western states, appears quite favorable in comparison to past periods of monetary tightness. Continued high levels of demand, based on favorable demographic trends and further motivated by the protection from inflation and tax shelter provided by real estate, should serve to prevent major increases in unsold inventories of new housing. The critical variables to be watched during the months ahead are interest rates and savings flows, which will determine how much money willbe available, at what cost, to finance the construction and purchase of housing.