It seems that no news is good news these days when it comes to the U.S. housing market.
This week, the National Association of Home Builders hosted a Construction Forecast Conference that took a hard look at sobering market statistics while supplying glimpses of hope for a turnaround.
Eric Belsky, executive director for the Joint Center for Housing Studies at Harvard University, said that home builders are “trying to pull out of a nosedive” by dramatically cutting back production rates. “They’re trying their damnedest to get out of this,” he said.
The unsold inventory had ballooned more quickly than anticipated, though, and single-family overbuilding is a key threat to house prices and starts, Belsky noted in his presentation at the conference.
Total housing starts this year are expected to drop about 15 percent this year compared to the 1.51 million level in 2006, according to Belsky’s report, “A Preview of the State of the Nation’s Housing 2007.”
Single-family starts are expected to fall 19 percent, with new-home sales dropping 12 percent and existing-home sales down 0.2 percent this year compared to 2006.
“Beware a recession down the road,” the report cautions, and Phoenix, Las Vegas, Florida and Washington, D.C., are “bellwethers” for the housing market.
In the long-term, the forecast calls for 2 million more households formed between 2005 and 2015 than in 1995-2005, second-home demand is expected to strengthen, and there will likely be a higher demand for replacement housing. But “affordability problems will act as a drag,” according to the report.
“House prices have only begun to correct,” according to the report, and Belsky added, “they’re going to continue to correct until inventory is worked off enough.”
While weak job growth has created economic problems in some areas, Belsky also noted that negative job growth could lead to a downward economic spiral.
Thomas A. Lawler, of Lawler Economic & Housing Consulting LLC, noted in a separate report that the inventory of for-sale homes surged in 2006, “both from past excess building and from previous investors putting homes up for sale.”
Rising interest rates and a run-up in home prices led to a sharp decline in affordability, which led to softening prices and lower investor demand. A surge in delinquencies and foreclosures for “risky” mortgages, and subsequent credit-tightening by lenders have also contributed to the downturn, according to the report.
Several indices have reported shrinking home-price appreciation and price depreciation in some cases, according to the report, citing sources including the National Association of Realtors, Standard & Poor’s/Case-Shiller and the Office of Federal Housing Enterprise Oversight.
The Lawler report cited the home-price futures market operated by the Chicago Mercantile Exchange, which shows a composite 6.1 percent price drop in 2007, with an expected 7.4 percent drop in Boston and a 6.7 percent drop in Washington, D.C.
Home-price depreciation can be a symptom of weak economic conditions but can also occur in areas with healthy economies, according to the report. “Home prices have declined in areas where the economy hasn’t, but where investor buying (and) loose credit boosted home prices … then home building outpaced ‘core’ demographic demand,” the report states.
David Seiders, chief economist for the National Association of Home Builders, stated in an economic report released this month that a lopsided supply-demand for housing “has downside implications for house prices and has prompted downward revisions to NAHB’s forecasts of home sales and housing production for the balance of 2007-08. However, we’re still showing a gradual recovery process beginning around mid-2007.”
Also, “massive uncertainties about the likely adverse impacts of the emerging mortgage market problems on both the effective demand for homes and the dimensions of the inventory overhang (via foreclosures) have created an unusually broad range of risk” that could impact the association’s forecasts.
In a March survey of 400 single-family home builders, the association found that one-third of builders reported that “tightening lending standards had taken a toll on their home sales in the early part of 2007,” Seiders reported, accounting leading to an estimated median loss of 10 percent in sales volume.
“Our survey also showed that larger builders, as a group, had been more dependent on subprime mortgage financing than smaller companies in 2006, and relatively high proportions of the larger companies said that tighter mortgage lending standards had taken a toll on their sales volume early this year,” Seiders reported.
A follow-up survey in April found that 30 percent of builders reported rising cancellations as a result of the tightening in lending standards.
The association forecasts a gradual recovery of home sales and housing production beginning in mid-2007 and extending through 2008 and beyond. “However, the projected levels of new housing units remain well below our estimate of the sustainable trend level of production,” which is around 2 million units for year, so that the correction process that began in 2006 will effectively “extend through 2008 and beyond.”
A separate report by the Bernard M. Markstein, director of forecasting for the builders’ group, states that single-family starts are expected to total 1.16 million units this year, down from 1.48 million in 2006. And single-family starts are expected to rise slightly to 1.23 million units in 2008.
Nariman Behravesh, chief economist for Global Insight Inc., said in his housing outlook that he expects “a soft landing despite the housing recession” for the U.S. economy. The housing-market decline should extend into 2008, according to the report, and core inflation is expected to “hover around 2 percent, leaving little room for interest-rate cuts.”
Overall economic growth “will stay below trend through 2007,” Behravesh concluded in his report.
The “mortgage meltdown” will drop housing demand while increasing supply, and global investors “are in deep” in holdings of U.S. mortgage-backed debt, as is the U.S. banking system, according to another report by Mark M. Zandi, chief economist for Moody’s Economy.com.
