...And A Housing Revival May Be On The Drafting Board

Housing market observers are also looking far ahead. Economist Giulio Martini of Sanford C. Bernstein & Co. doesn't expect a snappy housing recovery this year, partly because he thinks the market has only recently moved below underlying demand. But his longer outlook is considerably brighter.

Martini points out that housing starts during the depressed 1979-82 period actually fell below new household formations by about 350,000 units a year--and that's not counting replacement needs. Thus, huge pent-up demand fueled a housing explosion when the recovery began in 1983, pushing starts to a peak 1.81 million units in 1986.

By 1988, however, Martini calculates that residual housing needs from the early 1980s had been satisfied, and starts were moving closer in line with underlying demand. It's only in the last year or so, he says, "that starts have fallen below that level."

The upshot, says Martini, is that there's relatively little pent-up demand for housing to fuel a strong bounceback this year, even if interest rates keep sliding. The good news, however, is that his estimates suggest that basic demand over the next five years--reflecting average annual household growth of about 1.2 million and replacement needs of 250,000 units a year--will require about 1.45 million starts annually. That compares with about 1.2 million units started last year.

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