Housing Continues Downhill Slide
December 3, 2007
WASHINGTON - After rising to an exhilarating high, the housing market now remains on a downward slope. Despite earlier forecasts that it would reach bottom this year, it appears the bottom is still months down the road. At the latest National Association of Home Builders (NAHB) Construction Forecast Conference, economists presented generally gloomy outlooks on housing with some occasional glimmers of hope.
“Is the housing correction over?” asked David Seiders, NAHB’s chief economist. “No,” he said. “We definitely have downward momentum.” He added, “The mortgage credit quality problem is worsening.”
He then asked, “Are housing starts going to be up in 2008?” He remarked, “Almost definitely not.”
Housing will continue to be a drag on the economy in 2008, said Seiders. Things should pick up later in the year.
Single-family building permits topped out in the third quarter of 2005, and they have been declining since. “But the overall economy continues to move ahead at a decent pace,” noted Seiders.
The housing industry is seeing very heavy home inventory, he said. There is “quite an overbuilt situation out there.”
Seiders commented that he expects to see more easing in interest rates from the Federal Reserve. A positive is that mortgage rates are still relatively low.
His forecast for single-family housing starts is that they begin bottoming out in the second quarter of 2008. Regarding multifamily housing starts, he noted that the condominium market is weakening badly. He predicted that multifamily will pick up in the middle of 2008 and be all rental market.
Once housing rebounds, Seiders said he believes the long-term growth potential of housing is very good.
Maury Harris, managing director and chief economist at UBS Investment Bank, forecast that housing starts would be at 1.37 million for 2007, while starts would be down to 1.24 million in 2008.
Unsold home inventories were piling up through August, Harris said. Lower real home prices reflect a high excess supply of vacant units.
Although it hasn’t happened yet, Harris stated, he believes home prices could decline as much as 10 percent. Such an occurrence would make this the largest decline in home prices since the Great Depression.
However, he noted that economists are not forecasting a recession because consumer spending has not been knocked out. It is still holding steady.
“Orders for nondefense capital goods peaked last year and have sort of been on a platform,” related Harris. If this goes down, that could be a problem, he said.
A BRIGHTER OUTLOOKMichael Moran, chief economist for Daiwa Securities America, offered a less pessimistic view than the first two speakers.
First, looking at the troubled subprime mortgage market, he said that the subprime market is only about 13.5 percent of the overall market and not all of these are under stress. About 20 percent are under stress. That means only 3 percent of the market overall is under stress.
As for home prices, in his view “housing prices are holding up relatively well.”
Moran said he sees a gradual adjustment in home prices. In the past, he said, it was an “exuberant market.”
The real risk right now, according to Moran, is a credit crunch.
The bond market is holding up reasonably well, he said. But problems are possible in the short-term market. If there’s a contraction in commercial paper, companies will go to commercial banks looking to borrow money and the banks could pull back on credit.
Moran’s outlook for housing has home sales bottoming out in the first half of 2008 and picking up somewhat in the second half. He likewise has housing starts bottoming out in the first half and picking up in the second half of 2008.
Consumer spending will hold up, stated Moran. Job growth will slow but remain positive. Moran also said that energy prices will not pose as severe a problem as in the past. It’s a smaller share of the consumer’s budget.
Net worth, he said, remains favorable. “Debt has gone up but so have assets.”
The inflation outlook also is favorable but stability is not assured, Moran said. The Federal Reserve has to be careful. Inflation expectations are generally under control. “The Fed has to keep it that way.”
THE REGIONAL PERSPECTIVE“I have been surprised by the downturn” in housing, admitted Mark Zandi, chief economist for Moody’s Economy.com. “I believe home sales will hit bottom in the current quarter.” As far as housing starts, Zandi said, it won’t reach bottom until the second or third quarter of 2008. Home prices, he said, will go down through 2008.
Looking at regional markets across the country, the housing downturn is broad-based, Zandi said. California, Florida, and southeastern Michigan are down sharply. But it’s down throughout the United States.
A fundamental problem is that “there are too many homes out there in inventory,” he said. Also, the financial shock in the subprime mortgage market, with a number of subprime loans expected to default, has spooked investors.
“I don’t think this crisis is over,” he said. “It has certainly abated.” But the risk of another round of financial turmoil is possible. “The job market is weakening more than the official data say,” Zandi commented. In the third quarter, growth was well below trend.
Regionally, the industrial Midwest is in recession, he said. Some areas of the South and some metro regions in California are struggling, and more will struggle in the coming year.
Zandi said he expects the current housing downturn to be very comparable to the 1980s downturn in terms of starts and sales, and much worse in terms of home prices.
But, he said, this is in our control. Policy makers can make a difference. The Federal Reserve can help with low interest rates. Also, he said, Fannie Mae and Freddie Mac, which help provide mortgage funds to home buyers at reduced rates, should be allowed to be more aggressive to aid the market. In addition, Zandi said bankruptcy laws should be changed to swing back and be more favorable to consumers.
Continuing the regional discussion, Bernard Markstein, director of forecasting for the NAHB, said that in the second quarter of 2005, housing start growth was generally good across the country. In the second quarter of 2006, things started to turn downward. In the second quarter of 2007, it continued down. By the second quarter of 2008, said Markstein, starts will be down everywhere but bottoming out. Then in 2009, he said, we should be moving up across the country.
In 2005, there was strong growth in home prices, he noted. In 2006, home prices started to slow and in 2007 they continued to slow. However, said Markstein, the falling areas in 2007 are relatively localized - parts of California, Florida, Michigan, and portions of the Northeast. “In a lot of areas, prices are still rising,” he said.
Back in 2002, very few people had heard of subprime loans. “But, of course, things began to change,” Markstein said. By 2007, more than 12 percent of loans were subprime. But, again, problem areas have been localized.
One difficulty for housing is that the subprime problem has made some lenders skittish and they have tightened standards even on the prime market, said Markstein. So this is making it harder for some potential home buyers to get loans.
A LITTLE LEVITYThomas Lawler of Lawler Economic & Housing Consulting then provided a lighter look at the housing downturn.
“If you didn’t see this coming,” he said, showing a picture of a horse, “you should feel like this,” he remarked, showing a picture of a horse’s rear end.
Even while housing was slowing in 2006, Lawler pointed out, builders kept on building. It wasn’t until 2007 that housing starts began to decrease. Vacant homes for sale rose from the first quarter of 2006 to the first quarter of 2007.
Major home builders “had the long-term vision of a fruit fly,” said Lawler.
He noted that the subprime share of mortgage-financed home purchases increased steadily since 2002. From 2000 to about 2006, the home price index was up across the United States. Now it’s headed down. He stated that the subprime mortgage market was built to fail if home prices went down. The subprime loans were a risky product with risky underwriting, Lawler declared.
We have to determine, he said, “What is a sustainable level of home sales in a prudently tight mortgage lending environment?” This will be a lower level, not the unsustainable levels of the past.
Publication date: 12/03/2007