Shelter related industries at turning point

By Barbara Bennett Economist Federal Reserve Bank of San Francisco

Fter

several disastrous years for homebuilding and related industries, 1983 marked a sharp turnaround in these industries' prospects. New housing starts, which had sunk to less than l.l million units in 1982, increased nearly 5090 in 1983.

Several factors contributed to this remarkable improvement. First, the decline in mortgage rates during the first part of the year helped stimulate pent-up demand by easing potential homebuyers' affordability constraints. Second, the unexpected strength of the economic recovery produced gains in real income which were translated partly into increased expenditures on housing and housing improvements. Finally with the large overhang of unsold inventories cleared away during 1982, increased demand for new homes and home improvements in 1983 required an immediate and substantial increase in both construction activi- ty and in the production of homebuilding supplies.

Now as inventories of unsold homes and building supplies have, for the most part, reached a balance with the level of sales, the gains made by the homebuilding and related industries in the coming year may not be quite as spectacular as those in 1983. The possibility of a clash between growing private and public demands for credit may place upward pressure on mortgage rates and reduce the growth in expenditures on new homes and home improvements in 1984. Moreover, even if the much-feared clash proves to be little more than a minor skirmish, real interest rates are still likely to remain high by historical standards. Interest-sensitive industries, in general, and housing, in particular, may not rebound as quickly as other sectors of the economy, as a result.

Nonetheless, there is cause for optimism. The underlying demand for shelter remains strong, despite nearly unprecedented levels of real interest rates. The surprising firmness of house prices in 1983 as well as the rising level of rents in many areas attest to the strength of demand. Continued ecomonic recovery in 1984 will tend to further strengthen this demand. First, the rate o f household formation will likely pick up as the recovery gains momentum, giving a boost to housing-related expenditures. Moreover, gains in real income will ease homebuyers' affordability constraints, even at high real interest rates. Thus, while the rate of growth in housing expenditures in 1984 may not rival that of 1983, the homebuilding and related industries can look forward to a period of continued recovery.

Certain trends in housing expenditures that became apparent in 1983 will continue in 1984. As long as mortgage rates remain at relatively high levels, the tendency towards downsizing new units will prevail as one means of helping homebuyers overcome affordability constraints. Likewise, multi-family construc-

Story at a Glance

No interest rate relaef housing rebound sluggish. strong demand for shelter. multi-family & rental construc. tion holding on. pivotal year.

tion will continue to grow in many areas. Rental housing construction, in particular, will continue to make its comeback as a result of rising rents and changes in the tax treatment of rental properties.

Finally, 1984 is likely to be a pivotal year for the homebuilding and related industries, as it will be for the economy as a whole. If the Congress and the current administration can make progress toward resolving the problem of large structural deficits and thereby avoid a credit clash, long-term interest rates will likely drop substantially, laying an excellent foundation for a strong rebound in housing-related expenditures.

These are the author's opinions and do not necessarily represent opinions or policia of the Federal Reseme Systemed.

BrTtce's Building Materials has opened a new contractor/builder facility in Puyallup, Wa., Dave Iwata mgr. National Lumber & Supply, Santa Ana, Ca., has acquired sites for four more stores to open in the next l8 months; aWest Los Angeles unit debuts next month...

Berg Hardware ond Supply, headed by Arthur Berg and Steve Ellwood, has opened in Portland, Or.; they acquired Empire Pocific Industries earlier this year. Four Star Building Materials has opened its 3rd store, 15,000 sq. ft. under roof, in El Sobrante, Ca.

Richert Lumber Co., Livermore, Ca., has moved into a new 3000 sq. ft. retail showroom with a 6000 sq. ft. warehouse slated for spring completion.

Pay 'N Pak, Kent, Wa., will open its first Home Improvement Warehouse Outlet in Honolulu, Hi., in Feb.; 12 more warehousetype retail units will be opened in the San Francisco Bay Area by 1985, served by a recently opened 170,000 sq. ft. distribution center in Hayward; their 56,000 sq. ft. prototype warehouse store is being reformatted in Kent; store No. 100 is now open in Chico, Ca..

Whittier Lumber, Whittier, Ca., received a beautification award from the Whittier Beautiful committee for yard improvements . ..The Price Club will open a retail outlet in Azusa. Ca..

Specialty Forest Products has moved from Phoenix, Az., to nearby Chandler on the Pima Indian Reservation with an all-wood office and warehouse on 7 acres ., ,Knox Lumber Co., a wholly rwned subsidiary of Southwest

Forest Industries, Phoenix, Az., is making a stock offering of 2.4 million shares..

Hodge Forest Industries, Inc., Boise, Id., is modernizing the former ldaho Hsrdwoad sawmill it recently acquired at Kootenai, Id....The Anderson, Ca., planning commission has dropped a proposal to revoke a use permit for Chaps Lumber Co.. .

Western Forest Products Inc. is a new co. with a new redwood mill at Soledad, Ca., which starts production this mo. anticipating 25 million feet of production per year on a l-shift basis; Bob Deming, gen. partner, Mike Mosby, sales mgr..

Sanford-Lussier, Inc., is moving to new quarters at 2200 Nadeau St., Huntington Park, Ca., with a9000 sq. ft. miII,25,000 sq. ft. of lumber sheds and 15,000 sq. ft. moulding warehouse. Bonnell Lumber Co., Los Altos, Ca., has closed with the retirement of owner William L. Bonnell. Jr..

Genstar Building Materials, Flintkote Div., is closing operations in Palm Springs and Riverside, Ca. ...Plantique, Inglewood, Ca., has acquired Plant Friends. . Westmark & Associates, Costa Mesa, Ca., are new So. Ca. sales reps for The Lucas Group div. of Sherwin Williams.

Crown Zellerbach is selling its Port Townsend, Wa., mill to the Hsindl Paper Ca. of West Germany. .;Crown Zellerboch Conada is now operating with a new

The Merchant Magazine name: Crown Forest Industries

Limited Medford Corp., Medford, Or., has opened a fiberboard plant in Ireland.

Louisiana-Pacific will build a Waferwood plant on a 75 acre site near Oletha, Co. .Senco Fastening Systems has opened a new distribution system with centers in Hayward and Rancho Cucamonga, Ca., Portland, Or,, and Salt Lake City, Ut..

BF Goodrich has named Cozrmercial Wqllcoverings Source Irzc., Denver, Co., as a distri butor.

Manville Corp.'s reorganization plan asking permission to split into 2 companies is being opposed by lawyers for asbestos claimants .GAF Corp.'s sale of its building materials business to Centaur Metals Services, 1rc., has been blocked by a court order initiated by dissident shareholder Samuel Heyman...

FHA and VA home mortgage interest rates will now float with the market, rather than being set, under new fed. regs. effectiveearly next year...lenders clum adjustoble rate mortgages have been gaining favor with home buyers new home sales in Sept. (latest figs.) rose 13.7V0, following a 3-mo. decline.

Housing starts declined in Oct. (atest figs.) to a seasonally adjusted annual rate of 1,608,000 units, down 3.890 from Sept.'s 1,672,000 pace, but up 40.890 from a year earlier. permits increased 3.9V0 ta an adjusted annual rate of 1,565,000 units... multis rose 1.790; single-familyhome starts slid 7.ZVa.

Temecula Hardwsre & Lumber, a Lumber I companyo has broken ground in Temecula, Ca., for a new retail/wholesale facility to open next spring to replace the one destroyed in a $2 million fire in Sept..