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Housing Correction May Soon Run Its Course
Difficulties in the subprime mortgage market have prolonged the current housing downturn and have raised some uncertainties for the future, but economists participating in the NAHB Spring Construction Forecast Conference in Washington, D.C. on April 26 said they expect the industry to start turning around, as early as the second half of this year.
Looking at the broader picture, they said that the housing downturn, though steep, is unlikely to push the nation’s economy into a recession and that job, income and population growth will help support ongoing improvement in demand for housing.
Before it became evident how extensive the problems in the subprime market were and their adverse impact on the demand for housing was recognized, David Seiders, NAHB’s chief economist, said that he was expecting the housing correction to be winding down by this time.
 However, “the scene has changed in the past few months,” Seiders said. Housing activity and builder sentiment both looked like they were stabilizing toward the end of last year, but both receded in March and April to levels only marginally above cyclical lows.
“We are in another down leg and don’t know how long it’s going to run,” he said. Cancellations of sales contracts have turned up again, the trend in home sales has turned down and “we will see where it goes over time.”
Responding to market adjustments related primarily to developments in the subprime market, Seiders said that he has cut his housing forecast for this year by an additional 7% and projections for 2008 by 8%.
NAHB is now forecasting 1.455 million housing starts for 2007, a 19.9% decline from last year, and 1.528 million in 2008, a 5% increase. Single-family starts, Seiders said, are expected to show a 35% decline from their peak in the first quarter of 2006 to a trough in this year’s second quarter.
Seiders said that he expects single-family home sales to move up later this year based on economic fundamentals and a modest quarter-point decline in the Federal Reserve’s federal funds interest rate, perhaps in August.
Vacancies of completed homes, both for-sale and rental, have risen to an all-time high, he added, an indication of the excess supply of housing that was driven largely by the binge of speculative activity during the 2003 to 2005 boom.
Seiders calculated that there could be 1.3 to 1.4 million excess housing units in the inventory at this point, but noted that “markets can turn around when there is still inventory. You don’t have to work off every vacant unit in the country” before production turns around.
While that turnaround should materialize in the second half of the year, Seiders cautioned that it will take a couple more years before production reaches the 1.95 million homes, including manufactured units, that is the long-term sustainable trend for the industry.
In the meantime, he said, there are concerns over how many homes will be returned to the market from subprime borrowers who are unable to make their payments. Another unknown is the extent to which credit tightening for subprime borrowers will spread to the prime market. “A lot of tightening has already occurred, and we will get more but it may not be that big a deal,” he said. Subprime lending was mostly in ARMs, and those now account for only an 11% share of mortgages, down from 40% a couple of years ago.
The chief risk for a relatively optimistic scenario for the coming year is that housing will worsen and drag down economic growth, but panelists said that the preponderance of evidence suggests that it is more likely for housing to begin regaining its health from a strengthening U.S. economy.
 Although he believes that housing’s decline will extend into 2008, Nariman Behravesh, chief economist for Global Insight, said that “there has not been much of a spillover effect on the rest of the economy, and we expect that benign effect to continue.”
“There is no question that housing is in a deep recession,” he added, “but it hasn’t had a big effect on consumer spending.”
The U.S. economy has been in a slow-growth period, Behravesh said, but this year’s first quarter will probably turn out to be the weakest point of the cycle, with the gross domestic product growing at 1.3%. Growth is now moving into the 2% range, he said, and should be back to trend of about 3% by the end of this year or in early 2008, he forecast.
“All you have to have is housing stop declining for a positive impact on the economy,” Behravesh said. He expects a housing rebound to begin by mid- or late-2008.
And while the “subprime mess” is a serious problem, he said, subprime ARMs account for 8% of total outstanding mortgages. “Roughly 7% of home owners have negative equity, while 60% have equity of 30% or more,” he said. “So far, there has been very little impact on the prime mortgage market.”
Furthermore, banks are in “great shape,” Behravesh said, and the financial system will be able to deal with the subprime situation and, to some extent, “it already has.”
Behravesh predicted that home prices will fall for two consecutive years, with declines in the single digits, something that has not occurred in the U.S. since the Great Depression. However, this will help boost housing affordability, as will real wages, which are starting to rise again, exceeding inflation.
 “By Christmas we will probably see most of this nightmare over with what’s happening in the new home building business,” said Jim Glassman, senior economist for JP Morgan Chase.
Glassman said that the severity of the housing downturn is worse than he imagined it would be, but fears of out-of-control housing prices precipitating a bust with damage to the household sector and a sharp slowdown in consumer spending “hasn’t been what’s going on.” Instead, he said, prices are correcting as the result of mis-pricing in the new subprime market.
“Subprime was an important vehicle for new construction,” he said, so the current situation is “hitting builders more severely than real estate overall.”
With consumer spending “doing fine,” corporate profits at record highs and U.S. exports gaining strength from a surge in economic growth around the world, Glassman said that “we don’t have the right chemistry for” a recession.
Also, inflation has remained “broadly stable,” despite an explosion in oil prices.
Glassman predicted that home prices would fall 1% to 5% this year and next. “The West is most worrisome,” he said, because it is most out of line with national prices, and the region could experience “a few years of weakness” as a result.
With new home sales running at an annual rate of about 1 million, a starts rate of 1.5 million is “sufficient to slowly absorb excess capacity” in the housing market by this fall, he said.
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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