Economists Say Housing Should Rebound in 2009
November 17, 2008
WASHINGTON - The economists at the National Association of Home Builders (NAHB) Construction Forecast Conference generally believed that the battered housing market will start to make a comeback in 2009. But in their assessment of the economy, they raised the specter of the dreaded “R” word - recession. However, the speakers did point out the positives in the current turmoil.
David Seiders, chief economist for the NAHB, noted, “Things are a lot worse than any of us had anticipated six months ago.”
Housing starts “continue to spiral downward,” he said. “It’s a new world. It’s more difficult to forecast in this environment. The uncertainties out there are probably unprecedented.” This housing contraction, he stated, has been “world class.”
Seiders expects declines in gross domestic product (GDP) in the third and fourth quarters of 2008 and the first quarter of 2009. He said that we won’t know for sure until the federal government declares the official numbers, but the chances of a recession are “probably 100 percent.”
Seiders forecasts a recovery in GDP in the second quarter of 2009. However, “we won’t get back to positive job growth until later next year.”
He pointed out that the NAHB/Wells Fargo Housing Market Index, an indicator of builder sentiment, recently declined to 14, a record low. Net home sales for large builders have been declining steadily since the end of 2005, said Seiders. New home sales now are at the level of the early 1990s recession. But Seiders expects sales to start picking up in the first half of 2009 due to pent-up demand.
His forecast calls for single-family housing starts to bottom out in the first quarter of 2009 then pick up in the second quarter. Multifamily housing, on the other hand, should bottom out in late 2009 then start to rebound.
“Once we get this turned around, there is a lot of growth potential,” Seiders said.
NUMBERS CAN BE REVISEDMaury Harris, managing director and chief economist at UBS Investment Research, remarked that, looking at GDP, so far we’ve only had one minor negative quarter. “But just because the government doesn’t tell you we had a negative quarter doesn’t mean we didn’t have one.” The numbers can be revised downward later and the government can admit we’re already in a recession.
A positive is the decline in oil prices, which has led to a sharp decline in gasoline prices, Harris commented. This should help cushion the negative effects of the credit crunch.
Harris said that the United States’ ability to keep attracting global investment requires credible government intervention. He noted that the government still hasn’t announced how they’re going to buy back non-prime securities. This has caused uncertainty.
We can’t get the financial crisis resolved, Harris stated, “until we get the housing market stabilized.” Housing affordability “must get back to early 1990s levels before there was extensive subprime mortgage lending.”
Harris believes home sales can recover by spring 2009. If things are not better by this time next year, Harris asked NAHB officials not to invite him back. “I don’t want to show my face.”
Michael Moran, chief economist for Daiwa Securities America, said that the economy was slow earlier in the year but it really stumbled in September. The Institute for Supply Management (ISM) Manufacturing Index shows that we’re right in line with the early 1990s recession.
The price of crude oil has come down a lot, but “it’s still high by historical standards,” said Moran. So energy prices are not really a positive for the economy right now, he asserted.
The economy’s effect on household net worth is going to be a long-term impact, Moran said. He believes household spending is going to come back moderately. So he’s less optimistic about the long-term outlook for housing.
He expects GDP to be down in the first quarter of 2009, flat in the second quarter, then pick up after that. But he does not expect a deep, protracted downturn.
Moran believes the current financial turmoil is “out of bounds.” The markets have “gone mad.” It’s like a panic and is “disproportionate to the risks.” He stated, “If we survived the savings and loan crisis, we should be able to survive the subprime loan crisis.”
The savings and loan crisis of the 1980s cost the United States 2.3 percent in GDP, said Moran. The subprime loan crisis should cost us no more than 2 percent in GDP. So it’s in the same ballpark. “No one should be talking about a Great Depression.”
WITHOUT PRECEDENTMark Zandi, chief economist for Moody’s Economy.com, said that the housing bust we’re in is “without precedent.” House prices are down 20 percent from their peak. Home sales are down about 30 percent from their peak. Housing starts are down about 50 percent from their peak.
The current financial crisis “has turned into a panic,” said Zandi. This financial panic “is going to abate,” he said, because of the actions being taken by policy makers. These include: equity investments in banks; reverse auctions of mortgage assets, which will establish a price for these assets; the Federal Reserve buying commercial paper; the Fed paying interest on reserves; guaranteeing bank debt; the global coordinated interest rate cut; and insurance for money market funds and deposits.
Zandi stated that the economy is in recession throughout much of the country. He said that 27 states are in recession and 14 states are close to recession. Mortgage foreclosures have been surging since 2006, he said, and the number of homeowners with negative equity has been growing as well. The unemployment rate is currently at 6.1 percent, and he believes it will peak at about 10 percent by 2010.
Zandi closed with three reasons to be optimistic:
1. Housing is becoming more affordable in a number of markets.
2. Housing inventories are peaking so that builders can work off the excess.
3. The nationalization of Fannie Mae and Freddie Mac will mean lower mortgage rates and more credit available.
REGIONAL OUTLOOKBernard Markstein, director of forecasting for the NAHB, then provided his regional outlook. Looking at changes in housing starts, in the fourth quarter of 2005, he said, already several states were showing negative changes in starts. By the fourth quarter of 2006, a number of states from coast-to-coast were down. In 2007, starts further declined. The forecast for the fourth quarter of 2008 is that almost all states will be down greater than 10 percent from the previous year.
However, by the fourth quarter of 2009, “many states will be rebounding” and by the fourth quarter of 2010, “we will really be coming out of the slump,” Markstein said.
Looking at current production relative to 2005 peak levels, Markstein said a lot of the excess housing inventory is in California, Nevada, Arizona, Florida, Georgia, and Michigan - states that overbuilt or, in the case of Michigan, that is economically distressed.
Markstein also pointed out that we are not seeing sharp housing price declines across the country. In some parts of the country, house prices are not falling and in others the decline is only up to 5 percent.
Publication date: 11/17/2008