New Year Rings in Housing Shift to a Buyer’s Market
Following strong growth over the past three years, home sales and housing production will recede this year to levels that were recorded in 2004, according to economists participating in an NAHB teleconference late last month.
NAHB Chief Economist David Seiders and JP Morgan Chase Senior Economist James Glassman were largely in agreement in their forecasts for housing and the economy, which were positive overall.
“We’re looking for a good economy through 2006, with GDP growth remaining strong and with job creation running at roughly the same pace as in 2005 — key positive factors in the housing outlook,” said Seiders.
“For housing, it will be a systematic simmering down process toward more sustainable levels of sales, production and price appreciation as opposed to a full-blown cyclical contraction,” he said. “In terms of single-family sales and starts, we’ll basically be retracing the increases we saw in 2005, heading back to 2004’s very healthy levels.”
Seiders forecast that overall housing starts will reach 1.94 million units this year, down from an estimated 2.06 million units in 2005 and just shy of the 1.95 million units started the year before last.
Single-family starts are expected to decline to 1.59 million this year, down from an estimated 1.71 million units in 2005, while sales of new single-family homes will ease to about 1.19 million units following a record-breaking 1.27 million last year. Multifamily production is projected to slip slightly from 354,000 units in 2005 to 350,000 this year.
“Multifamily is doing well, with the condo share of the market up to about 50% at this point,” Seiders noted. “We think multifamily starts will be pretty stable, with condos losing some market share in the year ahead and the rental side regaining some ground.”
Seiders noted that, “The remodeling sector in NAHB’s forecast is also showing persistent positive growth during 2006, partly reflecting hurricane-related expenditures. There’s also a huge amount of home equity available for owners to borrow against for home improvements across the country.”
Fed Tightening Nearing an End
Seiders said he foresees only a bit more tightening of monetary policy by the Federal Reserve in the coming year, as inflationary pressures remain in check. The average rate on a 30-year, fixed mortgage, around 6.3% at the time of the teleconference, should inch up gradually to about 6.75% by the third quarter and average about 6.6% for the year.
The pace of home price appreciation will be cut about in half over the next year, from an estimated average of 10.7% for 2005 on the Office of Federal Housing Enterprise Oversight's house price index for home purchases, to 6.5% this year and 4.4% in 2007.
The rate of price appreciation may have peaked in the second quarter of last year, Seiders noted, observing that many builders have been reporting increased buyer resistance to the higher costs of housing and are turning to buyer incentives such as upgraded options to help maintain sales volume.
Shifting to a Buyer’s Market
“It’s pretty obvious at this point that the real estate market is gradually shifting to more of a buyer’s market,” said Glassman. “This has been a case of real estate prices catching up to market fundamentals — not a ‘bubble.’” With this in mind, “It’s reasonable to assume that house-price appreciation will be slowing down to the single digits.”
Glassman’s description of the economic outlook for 2006 is “growth without the steroids.” In other words, he explained, conditions will be relatively good but without the benefit of tax cuts or cuts in interest rates by the Federal Reserve. He too sees core inflation remaining relatively tame in 2006, pegging it at 1.75%- 2%, which is why the Fed should be able to refrain from tightening monetary policy more than once this year.
Overall, Glassman believes that the current economic expansion is only at its midpoint. “The next several years should present a good backdrop for growth with low inflation,” he said. "It looks to me like a pretty good — if not ‘boomy’ — outlook for the housing sector.”