'Modest' Housing Recovery Forecast to Begin in 2008
Though there appears to be no let-up to the current housing downswing, economists participating in the NAHB Construction Forecast Conference in Washington, D.C. on Oct. 24 said they expect the industry to bottom out and to start turning around in 2008.
Acknowledging that there is definitely downward momentum in the market at this time — with starts, sales, prices and permits off and problems persisting in the subprime and Alt-A mortgage markets — NAHB Chief Economist David Seiders said that housing should nevertheless begin a modest recovery next year.
Despite the present market contraction, Seiders said that housing should begin to turn around next year for a number of reasons — the overall economy and job growth continue to move ahead at a decent pace, core inflation is under control, the late-summer credit crunch in mortgage markets is showing signs of easing since the Federal Reserve cut short-term interest rates on Sept. 18, and the supply-demand equation will be better balanced as builders begin to whittle down excess inventories.
He also noted that the evolving inflation picture gives the Fed latitude to enact more monetary stimulus to support the economy, if conditions warrant. Seiders is predicting that the Fed will cut short-term interest rates by another quarter of a percentage point when members of the Federal Open Market Committee meet on Oct. 31 and will enact a similar rate cut by year-end, bringing the federal funds rate down from the current 4.75% to 4.25%.
Starts and Permits Won't Move Forward Until Sales Firm Up
With the housing sector facing a large backlog of unsold inventory, Seiders said that starts and permits won’t begin to move forward until sales firm up.
“Home sales should bottom out by the end of the first quarter of 2008, and I have starts up in the third quarter of next year, assuming the inventory overhang stabilizes,” he said.
Residential fixed investment, which Seiders said could lop off as much as 0.8% from growth in the Gross Domestic Product this year, should stop acting as a drag on the economy and turn positive in the fourth quarter of 2008, he added.
NAHB is forecasting 828,000 new single-family home sales for 2007 and 781,000 next year, a 5.6% decline. Seiders noted that the peak-to-trough decline in home sales from the boom years of 2003 to 2005 is more than 40%, and as sales begin to move slowly upward beginning in the second quarter of next year, they will still only be on par with levels recorded in the late 1990s.
Total housing starts are expected to register 1.363 million in 2007 and 1.2 million next year, an 11.9% decline, according to NAHB projections. Single-family starts, Seiders said, are expected to show a 50% decline from their peak in the first quarter of 2006 to a trough in next year’s second quarter.
Seiders’ short-term forecast is based on several assumptions ― skillful management of monetary policy by the Federal Reserve, maintenance of solid growth in personal income and employment, a manageable wave of home mortgage foreclosures and better performance of mortgage markets going forward.
However, he observed that the long-term potential for housing activity is very good. “By the end of 2009, we may be at a pace of 1.5 million units of new housing production (including manufactured homes). Once we are out of the woods, we should see good growth in front of us — maybe 2 million per year.”
Foreclosures May Hamper Housing Recovery
Agreeing that the housing market trough is in sight, Maury Harris, managing director and chief economist at UBS Investment Bank, said that he sees “housing bottoming out in the first half of 2008 and starting to pick up in the second half of the year.”
The last time a housing recession was this serious was in the mid-1960s, Harris said, but the big difference between then and now is that “the Fed is not dealing with inflation.”
Like Seiders, he sees the federal funds rate dropping to 4.25% by year-end and holding steady through 2008.
In forecasting total housing starts of 1.37 million this year and 1.24 million in 2008, Harris said that the housing recovery will be hampered by a projected 500,000 foreclosures on subprime and Alt-A loans both this year and next.
“The foreclosures aggravate the inventory situation and weigh on the market more than in past cycles,” he said.
Harris expects home prices in the current housing cycle to “go down as much as 10%, though we are not there yet ― only at about 4%.”
Subprime Troubles Only 3% of Total Mortgage Market
Taking a “less negative” spin on the housing market, Michael Moran, chief economist of Daiwa Securities America Inc., said that most of the reporting in the media is “exaggerated” and “sensationalized.”
Specifically, he cited the overemphasis on subprime mortgages, which make up 13.5% of the market, compared to prime lending, with a 75% market share.
“Twenty percent of the subprime market is under stress,” said Moran. “Twenty percent of 13% is less than 3% of the total mortgage market. The economy should absorb this shock.”
In light of the huge run-up in home prices that occurred in many housing markets between 2000 and 2005, the current home price adjustment is “not especially alarming,” he said.
“We are seeing a gradual correction in home prices,” Moran said. “So far, in my view, housing prices are holding up reasonably well.”
Foreclosures Will Be Absorbed
As for the high number of foreclosures expected this year and next, Moran said the economic fallout will not be as severe as many analysts anticipate because the vast majority of home owners affected made small or no downpayments on their houses and will walk away without much of a loss.
“The big financial institutions will absorb these losses, but they have the capital to do it,” he said.
Moran forecast that housing starts would bottom out in the third quarter of 2008 at a rate of 1.25 million units.
On the inflation front, Moran believes the outlook “looks pretty good” and that the nation’s central bank has sufficient leeway to cut rates again, “but not dramatically. The Fed won’t adjust monetary policy to rescue the housing market. It will take a macroeconomic outlook.”
Predicting that consumer spending will hold up as job and income growth remain positive, all of the panelists pegged the odds of a recession within the next 12 months at anywhere between 30% and 40%.
“The real driving force in personal spending is net worth in the consumer sector, not home equity,” said Moran. “Consumers won’t back away because household balance sheets are in good shape.”
Photos by Morris Semiatin
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