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Some Local Housing Markets Losing Strength

While economists at last week’s NAHB Construction Forecast Conference agreed that the incredible ongoing strength of the nation’s housing industry will eventually start to fade, some markets will invariably fare better than others and Economy.com Chief Economist Mark Zandi and NAHB Director of Forecasting Bernard Markstein weighed the relative strengths and weaknesses of metro areas across the country to determine their prospects in the months ahead.

Home sales and production have reached a peak nationally, according to Zandi, and in many markets “home sales will weaken first, followed by slower house price growth and finally, a decline in housing starts.”

“No consistent weakening has shown up yet,” Zandi said, but home sales have probably reached a level “as strong as we’re likely to see” in the current cycle and home price gains are likely to slow next year and flatten out in the year 2007.

“Housing is increasingly overvalued,” Zandi warned, particularly in cities across California and Florida and in “juiced up” markets such as Washington, D.C. and Boston. And not all of the overvalued markets are in high-growth areas; hit hard by job losses, Lansing, Mich. is also on his watch list.

States where home owners have withdrawn the greatest amount of equity as a share of disposable income are particularly vulnerable to the potential financial ramifications of a housing market slowdown, he said. Californians have extracted home equity equivalent to 15% of their disposable income, more than any other state in the union; and at 22% of disposable income, Stockton, Calif.’s equity withdrawal is the highest of any U.S. city.

Also at risk for sizeable economic impacts in a housing slowdown are localities where a larger than average share of jobs are related to housing, including Florida, California and Virginia.

Strong household formations are unlikely to forestall against the declining strength of housing markets, according to Zandi. “My concern is that the demographic underpinnings of the hot housing markets are starting to erode,” he said, and in places where home-price appreciation has outpaced family incomes, out-migration has resulted. “Places where affordability is collapsing are now seeing significant outflows of migration,” he said, especially in California.

A final risk factor is the proliferation of exotic mortgage loans, which are being embraced the most in places where buyers are finding that this financing is the only way they can afford high house prices. The interest-only loan share of adjustable rate mortgage originations is highest in San Diego; the San Francisco Bay Area; Denver; Sacramento; Los Angeles; Modesto, Calif.; Riverside, Calif.; Atlanta and Las Vegas, in that order.

“These are the markets I think are in trouble,” Zandi concluded, “although I don’t think housing construction is going to fall nearly as sharply in California as it is in other areas,” in part because that state is far from overbuilt. He is also flying a red flag over Seattle and Tacoma, Wash.; Portland and Salem. Ore.; a handful of cities across Florida, Michigan and Wisconsin; Charleston, S.C.; Chicago; Phoenix and Tucson, Ariz.; and the Washington, D.C. region.

On a more upbeat note, NAHB’s Markstein noted that regional housing market patterns are converging, with low-performing sectors expected to start doing better while high-performing sectors “do less well than in the past.”

“In terms of our overall forecast and where we think the nation’s housing markets currently are headed, we’re essentially in agreement [on a projected leveling-off period] for 2005 and 2006, but for 2007, Mark is a little more pessimistic than our national forecast,” he said.

“2004 was pretty good for housing, and in 2005 we expected a slowdown, but interest rates continued to stay nice and low” and kept the momentum in housing markets much stronger than anticipated, Markstein said. “In 2006, we are seeing the first indications of a bit of a slowdown in some places, but it’s still a very solid market overall.”

States with the highest number of housing starts per capita next year should include: Florida, Georgia, South Carolina, North Carolina, Delaware, Idaho, Nevada, Arizona, Utah and Colorado, he predicted.

Auguring favorably for housing, states recording significant employment growth of 2%-4% over the past year include: Florida, Arizona, New Mexico, Nevada, Kansas, Colorado, Utah, Idaho, Montana, Washington, Oregon, New Hampshire, New Jersey and Delaware. States with the highest projected employment growth for next year are Nevada, Arizona, New Mexico, Colorado and Delaware.

Also propitious for housing are states with projected unemployment rates next year under 4.6%: Nevada, Montana, Wyoming, North and South Dakota, Nebraska, Minnesota, Oklahoma, Georgia, Florida, Kentucky, Virginia, Maryland, Delaware, New Jersey, Rhode Island, Maine, New Hampshire and Vermont.

NAHB expects to see more than a 10% gain in total housing starts next year in Montana, New York and Massachusetts, he said.

Photos by Morris Semiatin

Where Are the Top 100 Metropolitan Areas for 2006?

HousingEconomics Online,” the online publication from the NAHB Economics Group, is your single source for market analysis, forecasts, housing statistics and more. In-depth analyses, detailed Excel tables and overviews are available for all metro forecasts. To learn more or subscribe to “HousingEconomics Online”, visit www.housingeconomics.com.

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