Forecasters Say Housing Outlook Remains Bleak

Washington, D.C.—“Is the housing correction over?” The answer is no, according to economists gathered in April for the National Association of Home Builders’ semi-annual construction forecast conference. The long-term outlook for homebuilding remains promising, but excess inventory and problems in the subprime mortgage market mean new residential construction will remain weak into 2008.

“Is the housing correction over? We were hoping at this point the answer would be ‘yes,’” said David Seiders, NAHB chief economist, but “at this point, clearly, the answer is ‘no.’” Citing weak demand and heavy supply—vacant housing units for rent or sale are at an all-time high—Seiders has lowered his economic and housing forecast 7 percent for 2007, and 8 percent for 2008 (See Fig. 1 for current NAHB housing number projections).

“One reason I haven’t decimated the forecast is that adjustable rate mortgages’ share of home loans topped out a couple years ago at 40 percent, and have receded to 11 percent,” he added. “A lot of the tightening has occurred, so perhaps there’s not much further to go.”

“The correction has another year to run,” suggested Mark Zandi, chief economist for Economy.com. “Until we make a serious dent in this excess inventory, the housing market won’t see the bottom.” He also cited the erosion of mortgage credit quality as a serious concern, with the problem increasing especially in the Southwest, East Coast, Gulf Coast and Florida. “There’s been an extraordinary level of aggressive lending the past five years,” he remarked. “Many subprime loans face their first payment reset in 2007 and 2008. The pressure is still intensifying.”

The housing market correction will take some time, said Eric Belsky, executive director of Harvard University’s Joint Center for Housing Studies. He noted that even if numbers stabilize at recent rates, total starts will be 15 percent below 2006 and single-family starts will be down 19 percent. The key is to work off inventory, he suggested. “What shocked everybody was how rapidly the boom unwound,” he noted. “The builders were trying to react, but had almost no opportunity to pull out of the nose dive.”

“The deeper and faster the [builders and sellers] cut prices, the more rapidly the market will adjust,” said Bernie Markstein, NAHB director of forecasting. “The problem is that people don’t cut prices, particularly existing homeowners. But we are a growing population—we will work off the excess inventory.”

Focusing on what’s happening in the home mortgage industry, Markstein also noted, “There’s nothing wrong with the subprime market—it helps people buy homes. The problem is all the shenanigans that went on as it got started.” Like Zandi, he suggested problems with subprime loans concentrated in certain markets, pointing to the West and East Coasts. “The ugly will be bad for awhile, particular in Miami and California.”

THE ECONOMY
“The good news is that [the down housing market] hasn’t had much of a spillover effect on the overall economy,” said Nariman Behravesh, chief economist for Global Insight Inc. Housing is still in a deep recession, however, but it has not yet affected consumer spending. “Income growth and job growth are both good.”

Sharing his outlook was Jim Glassman, senior economist for JP Morgan Chase. “It’s wrong to think that recession is the kind of thing we need to worry about,” he said, pointing to a number of trends. “Household net worth is on the rise,” he noted, adding that while some experts are concerned that baby boomers haven’t saved for retirement, they are worth nearly double what generations past were worth. Tight credit spreads are an important indicator of trouble, he also noted, and today, they are “consistent with what you see in the best of times.”

Both Behravesh and Glassman agreed that the economy as a whole could withstand the impact of problems in the subprime mortgage market too. According to Behravesh, only 13 percent to 14 percent of all mortgages are subprime, and of those, only 8 percent are adjustable rate mortgages. He also contended that while roughly 7 percent of homeowners have negative equity, 60 percent have equity of 30 percent or more.

Factoring in that the U.S. banking system is in much better shape than back in the ‘80s, when the economy underwent similar trials, Behravesh said he was optimistic for the economy overall. “It’s helpful to step back when the newspapers are doom and gloom.”

Glassman pointed to the popular film “It’s a Wonderful Life.” In that movie, a man sees what his town would be like without the benefits of his home mortgage company and it’s a nightmare. Looking at the current situation in the mortgage industry, he added, “I do believe the nightmare will be over by this Christmas.”

LONGER TERM
Offering a distinct Wall Street perspective, Stephen Kim, a managing director from Citigroup covering the homebuilders and building products sector, reported some growing interest in the currently low-priced shares of builder stocks. “During this period of time, you should be looking for opportunities,” he explained. “Our stance on the homebuilders has been decidedly bullish,” he continued, adding, “The new thought is to focus on supply more than demand.”

The homebuilding market at one time was wide open for new companies to appear and compete for a share, Kim explained, but today land is growing scarcer. With their capacity to acquire and hold land, the big builders have a better opportunity to “earn an edge.” He pointed to a number of nuances in the homebuilding industry, including consolidation, something that usually doesn’t occur in a strong market, but which happened among builders throughout the most recent boom. “If you can’t explain the aspects of a market, you’re looking at it wrong,” Kim suggested. “We think there’s a multiple expansion coming.”
Perhaps the most optimistic view expressed at the conference came from Harvard’s Belsky who pointed not to economic, but demographic trends. Over the next 10 years, he stated, two million more households will form than did during the previous decade, and once past the current struggle we will see a demand in second homes. Affordability problems will be a drag on the market, but immigration will continue to drive housing demand. “The immigrant and second-generation age structure is unlike any other we’ve known,” he suggested. “The growth dwarfs the bubble from the baby boomers.”