Builders Report Rising Sales Losses From Credit Crunch
More tightening of mortgage credit for prospective home buyers just in the past month has further weakened housing market conditions and has increased chances that the housing downturn could draw the nation’s economy into a full-fledged recession toward the end of this year, participants in an Aug. 28 NAHB teleconference on the credit crunch warned.
In a national survey of builders just completed by the association, 62% reported that tighter mortgage lending standards had taken a toll on their home sales during the past month, said Jerry Howard, NAHB’s executive vice president and CEO. That was up dramatically from a 33% response when the same question was asked in March, he said.
The survey showed that among the hardest hit by the credit crunch are builders in the West, where 71% said they were losing sales, and big builders, 88% of whom said they were losing business because of the lending clampdown.
Of those who have seen a negative impact on sales, Howard said, the average decline registered 31% over the past month, up from 15% in March.
“The bottom line is that housing is hurting and it doesn’t look like it’s going to bounce back as quickly as we had hoped,” said Howard.
To head off any further deterioration, he said that the Federal Reserve needs to be more aggressive in cutting interest rates and restoring liquidity at the short end of the financial markets; Congress needs to pass legislation to modernize Federal Housing Administration mortgages and to reform Fannie Mae and Freddie Mac so that they can play a larger role in restoring stability in the mortgage markets; and the Department of Housing and Urban Development needs to support seller financing and other regulatory measures that would expand home building opportunities.
The leaders in Washington who can address the problem need to take the further erosion in market conditions that builders are now reporting from the field “with the same degree of alarm that we do,” he said.
Another Significant ‘Down-Leg’
Noting that “it’s very difficult to craft a forecast with an awful lot of confidence right now,” NAHB Chief Economist David Seiders said that he is now expecting new single-family home sales to bottom out by the end of the year with a 38% decline from their peak in the third quarter of 2005. Sales should average 800,000 during the fourth quarter and total 843,000 in 2007 and 869,000 in 2008.
He conceded, however, that the decline could be deeper “given the condition of the mortgage market” and that he was assuming that some severely damaged parts of the mortgage market will “regain some footing.”
Sales during this year’s second quarter had moved up “a tad,” Seiders said, “but we are looking definitely for another significant down-leg in the second half of this year, maybe even early next year.”
The conventional conforming mortgage market — loans up to $417,000 that can be purchased by Fannie Mae and Freddie Mac — “have been virtually unscathed so far” and should be providing financing at affordable interest rates that will fluctuate only narrowly through 2009.
Last year these loans comprised roughly half of residential mortgage lending and he said that he expected them to account for a rising share of the market in the face of the limited availability of subprime, Alt-A and jumbo loans.
Going forward, fixed-rate mortgages will become increasingly dominant, Seiders added, because it has become evident that the “problems of quality” have occurred primarily on the adjustable-rate side of the market.
The most recent eruption on the mortgage front, which occurred in the jumbo market, has put builders in California and other high-priced housing markets "in very deep trouble,” he said. Initiated by revelations of subprime problems earlier this year, investors in mortgage securities have become “uneasy” about the true value of those investments and are re-evaluating what they should be paying for them.
Single-family housing starts also are experiencing “an off-the-cliff decline,” he said, and will show a 43% drop from their peak when they reach a trough in the middle of next year. Single-family housing starts will slow to a seasonally adjusted annual pace of 1.02 million during the first half of next year, a 10% downgrade from his forecast of only one month ago, Seiders said.
Despite a 50% decline in condominium production, multifamily activity will fare somewhat better, with a 28% cyclical drop by the time it bottoms out in mid-2008.
Another Hit on Economic Activity
Faltering residential fixed investment will take “another major hit on economic activity” during this year’s second half, reducing growth in the gross domestic product by one full percentage point and reducing GDP growth to 2% in the final quarter, “at which point you start to worry about economic recession.”
Seiders calculated that the risks of the economy lapsing into a downturn will be about one-third in the final quarter, and then if the drag from housing starts easing off, the odds for a recession should recede to 20%. “But that’s a big if,” he said. The nation’s economy has been weathering the drag from housing well so far, “but the longer it goes on, the more you worry about the consumption side,” with house values eroding and poised to erode further. “It is important for the housing market to bottom out early next year,” he said.
Following record performance in house price appreciation at the height of the boom in 2004 and 2005, nominal housing values fell 6% in the second quarter, he said, when numbers on the S&P/Case-Shiller Home Price Index are seasonally adjusted and annualized.
Expecting “pretty much the same pattern” for housing and the economy forecast by NAHB, the Federal Reserve should be providing some good news at the Sept. 18 meeting with the Federal Open Market Committee deciding to cut the Fed funds rate by one-quarter of a percentage point. It will probably do the same at its meeting at the end of October, bringing the rate to 4.75%, Seiders said. Adjusted for inflation, this would leave the real rate at slightly under 3%.
“A third cut is not out of the question before year end,” he said.
The Fed is clearly now much more worried about the downside risks to the economy and less worried about inflation, Seiders said, and “will be there if things turn out to be worse” than people are talking about.