HOUSING STARTS
Capped by higher rates
After four record years in a row, and a boom that has extended for more than a decade, players in the housing industry keep wondering when it will be time to fold up their tents.
Developers fret about an 8 percent jump in the cost of building materials during 2004, as well as higher wages for construction workers.
Helping to keep construction near its zenith, however, is a torrent of money from overseas, as foreign investors seek the yields that U.S. mortgages provide. A four-decade low in interest rates means little to the Japanese, who get nearly nada on money held in Tokyo.
Get ready for Wednesday’s report on January housing starts to show a decline of 2.7 percent, even though mortgage rates have taken another tumble. That’s the prediction of Chicago economist Brian Wesbury, who says the construction industry has been on a plateau for the last 14 months.
“Housing starts have been remarkably stable while construction of single-family homes is holding at an all-time high,” said Wesbury, of Griffin, Kubik, Stephens & Thompson.
Looking head, he expects the Federal Reserve to continue boosting short-term interest rates. That will push long-term mortgage rates to about 7 percent by year’s end, Wesbury said.
“The housing market isn’t facing a bubble, but it likely will see a very small decline this year,” he said. “Prices will go down in some areas, but only in cases where there have been very hot levels of buying activity.”
RETAIL SALES
Gift cards keep giving
Despite their heavy helpings of mortgage debt, consumers are able to dig up enough scratch to rev up spending.
Economist Gina Martin expects Tuesday’s report on January retail sales to show a drop of 0.4 percent, mostly because car and light-truck volumes were in the slow lane. Excluding that factor, she said, sales were up about 0.4 percent.
“There were several snowstorms, short-term interest rates are rising, and the automakers really didn’t make much of a push with incentives,” said Martin, of Wachovia Bank in Charlotte, N.C.
However, consumers bought actively in discount and department stores, she said, with some using gift cards left over from the holidays.
“Americans seem to like the new clothing fashions, and families’ incomes as well as their net worths are on the rise,” she said. “The prospect for consumers as they look ahead to the spring and summer is quite favorable.”
Meanwhile, the most-watched event of the week may well be testimony Wednesday by Fed Chairman Alan Greenspan before members of Congress. With the central bank already having engineered a half-dozen interest rate hikes in seven months, Americans are looking for clues about when it will be time for a pause.
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EQUITIES
Reasons for optimism
The stock market is making a very slow start this year, with most gains confined to blue chips.
Chicago investment manager Douglas Nardi says he still expects equities to roll up gains of 10 percent to 15 percent this year, but “investors no longer are getting a free ride from the Fed.”
Reasons for optimism abound, however, said Nardi, of Legg Mason Investment Counsel.
“Corporations have a lot of cash on their balance sheets, and that can mean opportunities to boost dividends or generate additional growth,” he said. “We are at the stage where investors are skeptical, but that suggests there still is room for stocks to go higher.”