Katrina and the Housing Market

Even though the hurricane, which hit during the final week of the month, probably had little effect on the August numbers, we may be seeing the ''b...
Stephen TaubSeptember 20, 2005

New-home construction fell 1.3 percent in August, the second straight month it has declined, according to the Department of Commerce. Last month also marked the first back-to-back decline in housing starts since early 2004, the Associated Press reported.

“We see a flattening of housing starts and the beginning of a cooling process,” said David Seiders, chief economist at the National Association of Home Builders, the wire service added.

Hurricane Katrina hit during the final week of the month, so it probably had little effect on the August numbers; construction in September could be affected more seriously as projects are delayed. However, the fact that the housing stock in entire Zip codes was wiped out by the storm and subsequent flooding, the new-construction numbers are likely to receive a considerable boost from the Gulf area once the land dries out, the insurance money pours in, and builders determine that’s it safe to begin laying foundations.

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Indeed, the AP pointed out that Ken Simonson, chief economist for the Associated General Contractors of America, forecast that the price of building materials such as lumber and cement will rise by 10 percent or more next year, reflecting demand pressures related to Katrina. Before the hurricane, the wire service noted, that increase was pegged at 6 percent to 8 percent.

As a result, the Bush Administration is considering cutting the high tariffs on imports of softwood lumber from Canada and cement from Mexico in order to ease overall price pressures, according to the report.

Of course, the level of mortgage rates will continue to have a big say in the housing market. If 10-year rates — the benchmark for mortgages — remain at very low levels, the housing market will still experience high demand. But if rates start to climb, overall demand may cool, or prices may come down from what builders had hoped to receive.