Week of April 27, 2009
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Housing, Economic Growth Now Heading to Higher Ground

Housing Guru at Long Last Finds Grounds for Optimism

In a departure from his previous presentations at NAHB forecast conferences, Mark Zandi, chief economist at Moody's Economy.com, was “optimistic” at last week’s 2009 Spring Construction Forecast Conference.

The bottom of the housing recession is coming into view, he said, adding that there are several reasons for his optimism. Inventories have peaked and will begin to drop, housing affordability has improved because the price-income ratio has dropped dramatically, and mortgage interest rates are at record lows.

“Rates are below 5% and will stay there for quite some time,” Zandi said, noting that his forecast calls for a low of about 4.5% this summer.

Also fueling Zandi’s optimism, “more credit is on the way,” and the Administration is working hard to bolster the housing market.

Nevertheless, there are some troubling aspects to the market, he said. Confidence is at a record low, and there is no evidence that the employment situation is improving. The job market is “at a moment of truth,” Zandi said, and he expects it to begin to stabilize this summer. He also said to keep a close eye on measures of consumer confidence, which should begin to rise shortly before the recession ends.

In Zandi’s market recovery timeline, the first quarter of 2009 was most likely the low point for sales; starts will probably bottom-out in the second quarter. Failures of major financial institutions will start to diminish between the third and fourth quarters, and home prices will bottom-out in the fourth quarter of 2009.

“I expect prices to slide sharply, bottom out in the fourth quarter and begin to rise in 2010,” Zandi said. From peak to trough, there will be a 36% decline in prices, and it will be more than a decade before home prices return to the highs recorded during the recent housing boom, he added.

Zandi said he expects foreclosures to peak in the first quarter of 2010 and the jobless rate to peak in the second quarter. The Federal Reserve is likely to tighten the money supply in mid-2010, and a “self-sustaining expansion” should begin in the last quarter of the year, he said.

Bernard Markstein, vice president of forecasting and analysis for NAHB, agreed with Zandi that the first quarter of 2009 probably marked the end of the decline in residential construction.

Revisiting the housing market of recent years, Markstein noted that in the last quarter of 2005 housing starts nationwide were running almost 30% above “normal,” and only a handful of states — Wisconsin, Michigan, Ohio, Kentucky, Maryland and Alaska — were in the 75% to 100% of “normal” range.

By the end of 2006, construction was slowing, but “the pain was minimal.” A year later, at the end of 2007, the slowdown was accelerating rapidly and formerly “hot” markets — including California, Nevada, Arizona and Florida — had become problem markets. Nationwide, housing starts were at about 60% of normal, Markstein said, and housing experts were still hoping for a “soft landing.”

However, the soft landing didn’t materialize and by the end of 2008, single-family production nationwide had dropped to about a third of normal. Only three states — Montana, North Dakota and Wyoming — were in the normal range.

“By the end of this year, some improvement should begin to emerge, and 2010 should mark a significant improvement,” Markstein said. However, the pain will not be over for the formerly “hot” markets and the states in the Great Lakes area that continue to suffer from economic problems unrelated to housing.

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