Katrina to Slow Economy, Boost Housing Sector

NEW YORK – Swathes of U.S. Gulf Coast homes destroyed by Hurricane Katrina scar the region's landscape, but eventual rebuilding will stoke an already torrid national housing market, economists say.

The disruption in the region's energy supply, sparking record oil prices and crimping consumer spending, are seen thwarting aggressive interest rate hikes by the Federal Reserve. Mortgage rates (search) are sliding as a result, keeping U.S. home sales near record levels.

"Down the line, and we usually find this after natural disasters — and this disaster sticks out as being the worst — the normal process is immediate destruction of wealth and then stimulus to economic activity as you go forward" rebuilding and remodeling, says David Seiders, chief economist at National Association of Home Builders (search).

"It will help support GDP numbers as we get into 2006," he predicts.

New Orleans and other Gulf Coast areas are now in disaster recovery mode with floods, fires and evacuations the focus. Homeowners cannot return to assess what is left of their real estate, or their jobs.

The one-two punch of job loss and energy price spikes will at least temporarily slow the U.S. economy, analysts say.

"I think the Fed is going to be hard-pressed to go on blithely increasing the short rate at every FOMC (policy-making) meeting as we go through the year," says Seiders. If long-term and mortgage rates stay lower than otherwise expected, "it is a major plus for housing."

Fed Chairman Greenspan has warned of "frothy" housing markets, though stopping short of calling it a national housing bubble.

Average U.S. home prices surged more than 13 percent over the past year, the biggest 12-month gain in more than 25 years, a government report on Thursday showed.

Affordability has shriveled after four years of record home sales and double-digit price gains.

Some areas that had relatively slow appreciation are picking up steam, the report from the Office of Federal Housing Enterprise Oversight (search) found.

What stands between froth and downturn is an area's jobs picture, most economists agree.

U.S. employers hired 169,000 workers in August and the unemployment rate slid to a four-year low of 4.9 percent, the Labor Department (search) said Friday. This reflected the economy's improving health, before Hurricane Katrina.

"The question in New Orleans is what will happen to the economy. The key to housing is jobs," says Doug Duncan, chief economist of the Mortgage Bankers Association (search).

"If you see a significant loss of jobs, businesses that are going to close or move out of the area, that will have an impact on house valuations," he adds. "There's no question the regional economy will be devastated for some time."

The MBA estimates roughly 360,000 mortgages could be impacted in Louisiana, Alabama and Mississippi, representing some $48 billion. Some of these homes may be fine, but the owner may have lost a business and the means to pay a loan.

"Events like this traditionally cause fairly minor impacts on national macroeconomic performance," Duncan says. "You may see a few tenths of GDP growth off in the quarter that it happens and you may see a rebound" as rebuilding begins.

The region's ties to the energy sector might make the ripple effects of this disaster a bit more far-reaching.

Prior disasters, though, have had a limited effect on the massive $12 trillion U.S. economy, according to Bill Cheney, chief economist at John Hancock Financial Services.

"The big deal from the hurricane is the oil situation. If that gets resolved, then everything else is a footnote for the national economy," he says.

"Regardless of what happens to energy prices and interest rates, homebuilding is going to happen and that's going to affect the national statistics but not by a huge amount ... it sort of disappears in the context of the national economy," adds Cheney.

Economists say the national wealth from skyrocketing home prices could buffer pain from soaring oil and gas prices.

"It's when people view these changes as enduring that it really can affect their current spending behavior," says Seiders. "I think that is happening probably, and I'm hoping that house price appreciation, the equity accumulation, will help soften the blow in consumer spending."