Effort to Spur Home Sales Needed to Shore Up Economy
With reports from crucial markets around the country that the traffic of prospective home buyers has been picking up even as tighter mortgage financing conditions remain a hurdle for many, the NAHB Board of Directors at its Feb. 15 meeting in Orlando announced that the association will be making a major drive to pass individual pieces of legislation that will stimulate housing sales and help builders work down their unsold inventories.
2007 NAHB President Brian Catalde reported to the board that the association had seen “important results” in response to its “relentless” efforts to ease the credit crunch, which began choking off home sales at the end of the last summer with the revelation of problems in the subprime mortgage market.
At the top of the list of favorable developments have been Federal Reserve Board decisions that have slashed interest rates by more than two percentage points since September.
And only the week before the NAHB board meeting, the $168 billion economic stimulus bill passed by Congress contained several items that will help the ailing housing industry to at least some extent, Catalde said. High-priced housing markets that have been among those hit the hardest by the credit crunch are expected to benefit from provisions allowing the Federal Housing Administration to insure loans for up to $729,750 through the end of this year and allowing Fannie Mae and Freddie Mac to purchase loans up to that amount.
Businesses also received a boost from the stimulus package, he reported, with a 50% bonus depreciation in 2008 and more generous expensing rules.
However, “we didn’t get everything we wanted,” he said, with the Congress quickly approving a narrower House bill that omitted significant provisions aimed at “stabilizing housing and averting a full-fledged economic recession.” Those provisions, and others, were outlined in the centerpiece resolution passed by the NAHB directors.
Stimulus Arriving by Mail
Participating on a panel of economists at the International Builders’ Show (IBS) discussing the housing outlook, NAHB Chief Economist David Seiders said that the $117 billion worth of stimulus bill rebates that will be mailed out to tax payers should give the economy enough strength to avoid recession, but “the economy is in a really weak condition at the moment” and the one-time checks to consumers won’t produce much growth after the end of the year, when it will be up to housing to keep the upward momentum going.
In his Feb. 20 Eye on the Economy report, Seiders noted that falling mortgage interest rates in the prime market, falling house prices in some markets and growing income in most parts of the country have combined to boost housing affordability in recent months. Consumer surveys have been showing that a growing number of households believe that home buying conditions have improved recently, he added, providing “a glimmer of hope” for the housing industry.
However, he noted, “the dramatic housing contraction still has substantial downward momentum and the housing market still poses major downside risks to the economic outlook.
“The situation cries out for a second stage of temporary economic stimulus, directed squarely at the sector that’s at the root of the daunting problems facing the U.S. economy and the financial system.
“It must be recognized, first of all, that a substantial tightening of lending standards is occurring in all components of the home mortgage market, as recently documented by the Fed, and the tightening may make it impossible for prospective home buyers to obtain financing they can afford.
“Secondly, a record volume of vacant homes on the for-sale market inevitably will put persistent downward pressure on home prices, further sapping the quality of outstanding mortgage credit and making it even more difficult to refinance or restructure adjustable-rate mortgages facing payment resets. This problem, in turn, will bolster the alarming upsurge in mortgage foreclosures and dump even more inventory onto the for-sale market, stretching out the contraction in new housing production.
“House prices and inventories are central to the outlook for the economy and the financial markets. Policies that simulate home purchases in the meantime can pay huge dividends.”
Starts to Lose More Ground in 2008
“The vast bulk of the housing decline is now behind us,” Seiders told convention-goers in Orlando. However, starts this year are projected by NAHB to slip another 22%, following a 26% drop in 2007. The decline is expected to be even more pronounced in single-family home production, which declined 30% in 2007 and is forecast to erode 27% further this year, he said.
The foundation for the long-awaited housing recovery should begin with a stabilized sales volume in the second quarter of this year, followed by improvements in sales later in the year and in 2009, he said.
“The inventory overhang will delay the starts upturn to some degree,” he said, and the rebound, once it arrives, will be “muted” compared to some previous recoveries.
(One of the points emphasized by a panel of builders at the IBS discussing what they are doing to steer their businesses through stormy times is that working actively to adapt to current adverse conditions is paramount to surviving and that to succeed once the recovery does arrive builders will need to be prepared to respond to a significantly different marketplace than the one leading into the downturn. A story on their presentation will appear in next week’s issue of Nation’s Building News.)
Frank Nothaft, the chief economist for Freddie Mac, said that the one piece of good news is that “for prime borrowers looking for a conforming loan and a full-document loan and who can make the downpayment, this will be a very good year.” He added that prime borrowers would find ample liquidity.
Nothaft said that conforming fixed-rate 30-year loans should average 5.5% this year, with jumbo loans “a lot more challenging” and averaging a full percentage point higher.
David Berson, chief economist for The PMI Group, told convention-goers that he believes the economy has already lapsed into a recession, and although it will be “short and mild,” this will exert more downward pressure on housing and the mortgage market.
Home sales should “flatten out” in the second half of the year, Berson forecast, maybe close to the end of the year, and starts won’t stabilize until the first half of 2009.
Based largely on a conversation overheard at the San Francisco airport, Berson said that home owners could start deciding to default on their loans because the value of their houses has fallen below the loan amount, not because they can’t make the monthly payment.
However, unless there is a behavioral change, “historically, the vast majority of home owners continue to make their payments when they owe more than the house is worth, he said.
Congress, Administration, Fed Need to Do More
In its resolution on addressing the housing downturn and the mortgage credit crunch, the NAHB Board of Directors said that “while interest rate cuts by the Federal Reserve Board, efforts by the Administration to limit foreclosures and the recently enacted economic stimulus package are steps in the right direction, more needs to be done to stabilize the housing market and keep the economy moving forward.”
The directors called on Congress and the Administration to:
- Extend the increase in conforming loan limits for Fannie Mae and Freddie Mac to at least two years and link this effort to full reform legislation for the housing government-sponsored enterprises
- Modernize the FHA to further assist first-time and moderate-income buyers
- Create a menu of tax credits and other incentives to stimulate home sales and help reduce the inventory of unsold homes on the market
- Allow businesses to carry back net operating losses for five years to save jobs and help businesses weather the economic storm
- Expand and provide more flexibility for the mortgage revenue bond program
- Expand the definition of a qualified investment for a tax-deferred retirement account — such as an IRA or a 401(k) — to allow investment in a first-time home by purchasers, their parents or grandparents.
The board also said that the Federal Reserve Board should monitor economic conditions closely and, as needed, reduce interest rates and take other steps to bolster confidence and inject liquidity into the banking and financial system.