More Dark Clouds in Housing's Future
by Lew Sichelman
The housing outlook continues to become more dour by the week.
At the Southeast Builders Conference in Orlando earlier this month, Mark Zandi of Moody's economy.com said the sector in not likely to recover fully until 2010. And in Washington, David Seiders of the National Association of Home Builders said "most indicators point toward further deterioration."
Also in Washington, Fannie Mae Chief Economist David Berson has once again lowered his projections for home sales and starts for 2007. Home prices will continue to fall as well, he said in his latest monthly forecast.
The three economists' gloomy outlooks came on the heels of a National Association of Realtor report early in July that said builders will have to limit their output well into next year if the unsold inventory of both new and existing houses will return to normal levels.
NAR reported that it's main indicator of current activity -- the pending sales index -- fell in May to its lowest level since September 2001. Since May 2006, the index, which reflects contracts that are set to close in the proceeding two months, has dropped 13.5 percent.
At the SEBC regional housing conference, Zandi said the market won't hit bottom until there is a significant combination of reduced production and price cuts.
Builders have been cutting back on starts and pulling out all stops to lure buyers to their projects, offering not just price cuts but also any number of free upgrades and other add-ons. As a result, Zandi said, "The worst of the decline is over."
Nevertheless, he told the assembled builders and allied residential construction industry professionals that they are "a long way from recovery."
"We think the cycle continues on a downward path in 2008, with 2009 as a stabilizing year and 2010 as a return to more normal activity," he said.
In Washington, meanwhile, Seiders, the NAHB's chief economist, said single-family starts will plummeting this year by 23 percent. He expects starts to turn positive next year, but he said the year-to-year gain will be "less than 1 percent."
Seiders said the "dramatic downward correction" that has been underway for the past 24 months is a result of tightening mortgage market conditions in the wake of the subprime debacle as well as the startling number of investor sales that have come back to haunt builders.
"It appears that there's an excess of at least 1.3 million vacant housing units on the market," he said, adding that while the inventory is made up largely of for-sale houses, the number of for-rent units also has climbed to a new high.
Nevertheless, despite the challenges faced by builders, the NAHB expects to see home sales move back to an upward path late this year and housing starts to begin a gradual recovery process by early next year.
"At that point, this market will be operating well below its long-term potential, providing plenty of room to grow in 2008 and beyond," said Seiders, who is scheduled to give his mid-year housing forecast this afternoon.
If Fannie Mae's Berson is on target, the projected level sales – 900,000 new homes in 2007 and 5.8 million resales – would be the lowest since 2002, and the two-year decline (2006-07) would be the largest since the housing downturn of 1989-91.
The "significantly larger decline" in production – 14 percent – stems from the need to cut into the "near record" inventory of completed but unsold homes. "The large number of unsold units also is putting pressure on house prices," Berson said.
He expects prices in the part of the market served by his company and chief rival Freddie Mac to remain unchanged, but he thinks prices in the more expensive segment above the $417,000 conforming loan limit will be off by 2 percent.
The economist also has cut his projection for mortgage originations. Now he says production "will slow" to $2.47 trillion, a 10.5 drop from $2.76 trillion in 2006. About half the new loans written this year will be refis, he said, as ARM borrowers continue jettison their loans before they reset.
Back at the SEBC, Ken Harthausen of Countrywide Home Loans, Calabasas, Calif., said unsold inventories are "high and not going down."
Though Harthausen is not a economist, he spoke of a "hidden inventory" that has yet to be considered in the mix -- houses owned by people who want to sell but haven't put their homes on the market because of weak prices.
As a result, the Countrywide official told the builders' meeting, the decline in sales "may not even subside until 2009."
Another SEBC speaker, Ted Jones, chief economist at Stewart Title Guaranty Co., Houston, told a convention session that builders in Florida are "still overbuilding" in the face of flagging sales.
Noting that as a general rule, there should be 1.25-1.5 new jobs for each new housing start, "even in resort and retirement areas" where service workers are in demand, the economist said only 0.81 jobs are being created on a state-wide basis for each dwelling that is being started.
"You are delaying your own recovery," Jones said. "You've simply got too much supply. Jobs are everything."
(Separately, Seiders concurred. Not only has there been "gross over-production," he said, "we're still getting a heavy flow on completions in markets that were already over-supplied by 2006.")
According to Jones' count, there are 50,000 finished units in the Sunshine State that "have never been slept in" and 40,000 more units under construction.
"We're building too many homes," he said. "Home buyers today are like buzzards flying around looking for roadkill."
Buyers, on the other hand, are waiting for prices to bottom out, and many don't think they have, he added. Consequently, he predicted that home sales should fall 6-11 percent more this year.
"Some local bubbles are bursting and have yet to hit bottom," Jones ventured. "The worst markets are in Florida, California, Arizona and Nevada."
In NAR's latest forecast, senior economist Lawrence Yun said he expects home prices to start back up again sometime next year. But at the same time, he warned that such would be the case only in places where builders take their feet completely off the gas pedal.
"Markets that sharply reduce new construction in 2007 will generally experience respectable price increases in 2008," he said.
Finally, Freddie Mac economists said they expect mortgage originations to decline by 8.5 percent this year due to fewer home sales, slower growth in home prices, and rising interest rates.
"We now forecast total mortgage originations in 2007 to hit 2.75 trillion," down from 2.92 trillion last year, they said. Freddie Mac economists also estimate that new and existing single-family home sales (not counting condominiums) will decline by 6.7 percent this year, from 6.76 million in 2006 to 6.28 million.
Published: July 25, 2007
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