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Hot Markets Bearing the Brunt of Housing Downturn
 The current shakeout in the subprime mortgage market is adding to an already excessive overhang in the unsold housing inventory and will prevent the housing correction from coming to an end in the near term, according to Mark Zandi, chief economist at Moody’s Economy.com.
“The housing correction is now almost two years old and still has a long way to run,” Zandi said at last week’s NAHB forecast conference.
Areas of the country that benefited the most during the 2003 to 2005 housing boom — the Northeast, the West, Florida, Arizona, Nevada and parts of California — will bear the brunt of the downturn in the next year, he said.
Zandi predicted that home sales will bottom out in the second or third quarter of this year and that the trough for housing starts will occur in the third or fourth quarter, with new home construction falling to an annual pace of about 1.4 million units.
Home prices, he said, won’t hit bottom until the spring of 2008.
“We are half way done in terms of price decline,” said Zandi. “Prices are down about 4% and I expect another 4% to 6% drop-off. Home prices in early 2008 will be back to where they were in 2005.”
Too much inventory and the recent erosion in mortgage credit quality are the two biggest problems facing the housing sector, he said.
Zandi estimated there are 700,000 excess vacant existing homes for sale, and he characterized the pace of mortgage delinquencies as “shocking.”
“The delinquency rate is 2.9%, a new high,” he said, noting that the situation is particularly acute in California, Las Vegas, Florida, Washington, D.C. and the Gulf Coast.
Zandi said that there are a number of reasons to expect further erosion in the mortgage market:
- Aggressive lending has “juiced up the housing market,” including prime loans that are interest-only or option ARMs.
- Payment resets on adjustable-rate mortgages originated in 2005 and 2006 will face their first resets in 2007 and 2008.
- Mortgage lenders have reacted by moving aggressively to tighten underwriting standards at the same time that subprime and Alt-A borrowers, those with mid-level credit scores that fall between prime and subprime, are seeking to refinance.
As a result, he said, first mortgage loan defaults will rise to 1.2 million this year from 900,000 in 2006 and climb to a peak of 1.3 million in 2008.
“This means less demand and more supply,” he said.
 Providing a more sanguine outlook while conceding harder times for the nation’s most troubled housing markets, Bernard Markstein, NAHB’s director of forecasting, said that positive demographic trends will help ease the housing correction now underway.
“Demographics is how we work off excess inventory,” said Markstein, noting that nearly every state experienced population growth last year.
“Employment growth also looks good,” he added, with jobs becoming more plentiful in 2006 in every state across the nation, with the exception of Louisiana and Michigan.
Markstein also stressed the importance of home sellers taking a realistic perspective in today’s buyer’s market. For example, a home owner in the Washington, D.C. metropolitan area listed his home for $600,000 but was only able to sell it for just under $400,000.
The transaction suggests a significant loss, he said, but “he bought his house in 2002 for $260,000. That comes out to a gain of about 11% per year.”
“Demand for housing continues,” he said. “People are getting jobs and forming households. Once we work through excess inventories, builders will reduce their incentives. So you will see prices rise moderately in the future.”
Photos by Morris Semiatin
 Construction Forecast Conference Now Available on the Internet
The simultaneous Webcast of the Construction Forecast Conference — Spring 2007 held in Washington, D.C. on April 26 is available for purchase for the next three months.
Those interested can purchase the conference Webcast, which includes panels of nationally recognized experts discussing economic trends, government policies, developments in the housing industry and the results from NAHB's recent surveys.
Purchasers will receive unlimited access to the Webcast archive for three months, as well as electronic copies of the conference handouts and presentation material. Purchasers can watch at their own pace, rewind, fast forward and review important sections.
To Purchase the Webcast
To purchase the Webcast, visit www.nahb.org/cfcwebcast.
 Want to Know Your State’s Starts Forecast for 2008?
Find out in HousingEconomic.com’s State Starts Forecast (sample). The starts forecast includes downloadable Excel tables of total, single-family and multifamily starts by region and state.
To learn more, visit www.housingeconomics.com.
 NAHB Kit Gives Builders Back-to-Basics Tips in Cooling Market
With the current cooling of the nation’s housing market expected to persist into next year, NAHB has developed a comprehensive online toolkit geared to providing association members with information that will help them prosper in today’s changing business environment.
To access the “Back to Basics” toolkit, you must be an NAHB member and have a login to www.nahb.org. To create a login, go to www.nahb.org/login or click on the log-in button on the main menu bar.
For assistance, call the NAHB Member Service Center at 800-368-5242.
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