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Higher interest rates and energy costs will combine in 2006 to knock residential construction from this year’s record peak of 2.05 million starts, according to the National Association of Home Builders. Washington, D.C.-based NAHB predicts single-family housing starts will decline 6.6% next year, to 1.59 million, and then tumble another 3.6% in 2007. Multifamily housing starts will slip 0.5% in 2006, to 350,000, and hold at that level through 2007.

"The bump from rebuilding the Gulf Coast after Hurricane Katrina will not be huge," says Bernard Markstein, NAHB’s director of forecasting. He expects the rebuilding effort to only add about 45,000 starts in both 2006 and 2007.

That will not be enough to off-set rising mortgage rates, says Markstein. After averaging 5.85% for the last three years, NAHB expects the rate for 30-year fixed mortgages to rise to 6.5% in 2006. One-year adjustable-rate mortgages will continue to climb from 3.9% in 2004 to 4.5% this year before reaching 5.4% in 2006. The prime lending rate on commercial loans will rise from 6.2 to 7.5% next year.