ProDealer Economics

Alot of people were talking about the economy at the 11th Annual ProDealer Conference, especially since the lowering of interest rates coincided with the first day of the event. At two market focused presentations, those discussions took on a professional tone as financial analysts offered relatively upbeat views of the housing industry and the overall economy — given, of course, a subprime meltdown and starts that some expect to sink toward the dreaded 1 million per year mark.

In the conference’s kickoff presentation, Joshua Rosenbaum, director of the UBS Global Industrial Group, explained that only a matter of time stood between the current housing problems and a return to normalcy. “It really is a question of when, not if,” he said.

Of the six key macroeconomic factors—described as “pillars”—of the housing industry, five remain solid: GDP growth, interest rates, unemployment, inflation and non-residential construction spending. Housing starts, the sixth pillar, lags dramatically from 2006.

The smart money on Wall Street remains very interested in the housing and LBM companies, he added.

“Even throughout these very difficult times I always get calls from people whether it’s in public markets or private equity, that think this sector has very good long term characteristics, and they want somehow to be involved,” Rosenbaum said.

When asked for his own personal prediction on where housing starts will end up in 2007, Rosenbaum, who covers the building products sector, suggested data points to the 1.1 million to 1.3 million range. He noted it could be worse.

“In very recent conversations in the past couple weeks, you all tell me it’s likely to go down to about a million,” he said. “And I would trust those who every day are talking to people and seeing the backlogs and the inventory, [and I am] more inclined to go to the lower end.”

The half-percentage point interest rate cut might help people pull the trigger on deals, he said. “It’s jittery out there,” he said. “It’s jittery for your customers. It’s jittery in my world. It’s going to take time.”

Slightly more bullish was Paul Jannke, an economist who describes his reputation as decidedly bearish. The senior vp for wood products and timber for RISI pointed to the increasingly positive metric of housing affordability as good news.

Jannke described the over-building of 2003, 2004 and 2005 as a key cause of the dramatic decline in housing starts in 2007

Steadily growing underlying demand for homes by new household formations and the current period of under-building should send starts back up to the 1.7 million to 1.8 million range in 2009. “With the weaknesses forecast in 2007 and 2008, we will have completely made up for the over-building” of the previous four years, he said.

He also suggested the crisis in the subprime “is pretty much going to work itself out by 2009.”

There’s a chance (30 percent) that starts might fall to 1 million before then, pushing the economy into a recession. But he’s cautiously optimistic that the metric will bottom out closer to 1.2 million.

In 1991, a housing downturn pushed starts down to the unsettling 1 million level, but things are very different today. Household affordability, mortgage rates, GDP growth are all more favorable today than they were in 1991.

Plus, underlying demand for housing has grown.

“As population ages they have a tendency to form households at a greater rate,” Jannke said. “That’s a fact of our economy, the population is growing, it’s aging and we have a greater need for housing.”

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