Savannah Chamber

8 2 sector, which will boost consumers' inflation-adjusted buying power. Fourth, businesses' spending for new equipment and software will continue to expand. Fifth, crude oil and gasoline prices should remain at roughly the same levels as last year. Finally, limited inflation should reassure the bond markets and the Federal Reserve. If most of these expectations are realized and major federal fiscal policy mistakes or external shocks (e.g., major oil supply interruptions) are avoided, then the U.S. economy will continue to grow. There will be some headwinds, too. Declines in federal government spending will subtract slightly from GDP growth. Uncertainty remains extreme in many critical federal government policy areas, including the budget, the tax code, health care, regulation, and major reforms to popular entitlement programs. Government efforts to re-regulate certain industries, or to protect at risk economic sectors, will have the unintended consequence of reducing U.S. job growth. The EU's main structural problem has not been resolved, and its policy with respect to its sovereign debt problems is not inspiring confidence. Turmoil in the Middle East and North Africa increases the risk-premium embedded in crude oil prices. Housing Housing will be a strong tailwind for GDP growth primarily due to cyclical factors, but also because of favorable demographics. In 2015, the number of single-family home starts for new construction will increase by about 30 percent (or just under 1 million units). Existing home prices will continue to rise at a modest 4 percent. In most markets, home price appreciation therefore will continue to bolster the psyche of the consumer, households' net worth, and homeowners' ability to spend. Both the single- and multi-unit residential construction subsectors will contribute to growth. This broad- based upturn in housing activity will add 0.5 percent to GDP in 2015. That's significantly more than the 0.3. 0.3, and 0.1 percent contributed in 2012, 2013, and 2014, respectively. Looking ahead, the performance of the housing market will depend primarily on the performance of the labor market, mortgage rates, and credit conditions. Employment and personal income growth are expected in 2015. Those new jobs, and bigger paychecks--plus appreciating home values--will give more people the wherewithal and the confidence to buy homes, ensuring the housing market's recovery. Mortgage rates will remain a tremendous bargain, but will rise by about 50 basis points in 2015. Home mortgages also should be somewhat easier to obtain, however. Credit conditions will ease due to improving home values in most markets and slowly improving macroeconomic conditions. Despite overall improvement, credit will remain extremely tight for riskier loans. Credit lines and money to builders will still be somewhat scarce, restricting the supply of newly built homes. Also, low appraised values will stymie conventional lending as well as housing turnover. Despite recent home price gains, many households owe more on their mortgages than their homes are worth, which limits the availability of financing, especially for those with lower credit scores. Plus, many more homeowners are in near negative equity situations. These households will not be able to absorb the transactions costs involved in selling their homes, make a significant down payment, or qualify for a new mortgage. A potentially powerful demand side support for homebuilding is the rebound in the rate of household formation. Job growth will be the key to unlocking the pent-up demand for housing that built up as young adults opted to stay a home a bit longer. Moreover, improving job prospects will partially reverse the recent surge in college enrollment and might also slow the rate at which student loan debt is piling up. Indeed, record-breaking student loan debt is one reason why young adults delay moving out on their own.

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