Housing Economists Expect Market Turnaround to Begin in 2008

Though there appears to be no let-up to the current housing downswing, economists participating in the National Association of Home Builders Fall Construction Forecast Conference recently said they expect the industry to bottom out and to start turning around in 2008.

Acknowledging that there is definitely downward momentum in the market at this time, with starts, sales, prices and permits off, and problems in the subprime and Alt-A mortgage markets, NAHB Chief Economist David Seiders said that housing should nevertheless begin a modest recovery next year.

Despite the present market contraction, Seiders said that housing should begin to turn around next year for a number of reasons: the overall economy and job growth continue to move ahead at a decent pace, core inflation is under control, the late-summer credit crunch in mortgage markets is showing signs of easing since the Federal Reserve cut short-term interest rates on September 18, and the supply-demand equation will be better balanced as builders begin to whittle down excess inventories.

He also noted that the evolving inflation picture gives the central bank latitude to enact more monetary stimulus to support the economy if conditions warrant. Seiders is predicting that the Fed will cut short-term interest rates by another quarter of a percentage point when members of the Federal Open Market Committee meet on October 31 and will enact a similar rate cut by year-end, bringing the federal funds rate down from the current 4.75 percent to 4.25 percent.

With the housing sector facing a large backlog of unsold inventory, Seiders said that starts and permits won’t begin to move forward until sales firm up.

“Home sales should bottom out by the end of the first quarter of 2008, and I have starts up in the third quarter of next year, assuming the inventory overhang stabilizes,” he said.

Residential fixed investment, which Seiders said could lop off as much as 0.8 percent in Gross Domestic Product (GDP) growth this year, should stop acting as a drag on the economy and turn positive in the fourth quarter of 2008, he added.

NAHB is forecasting 828,000 new single-family home sales for 2007 and 781,000 next year, a 5.6 percent decline. Seiders noted that the peak-to-trough decline in home sales from the boom years of 2003-2005 is more than 40 percent, and as sales begin to move slowly upward beginning in the second quarter of next year, they will still only be on par with levels recorded in the late 1990s.

Total housing starts are expected to register 1.363 million in 2007 and 1.2 million next year, an 11.9 percent decline according to NAHB projections. Single-family starts, Seiders said, are expected to show a 50 percent decline from their peak in the first quarter of 2006 to a trough in next year’s second quarter.

Seiders’ short-term forecast is based on several assumptions: skillful management of monetary policy by the Federal Reserve, maintenance of solid growth in personal income and employment, a manageable wave of home mortgage foreclosures and better performance of mortgage markets going forward.

However, he observed that the long-term potential for housing activity is very good. “By the end of 2009, we may be at a pace of 1.5 million units of new housing production (including manufactured homes). Once we are out of the woods, we should see good growth in front of us – maybe 2 million per year.”

Agreeing that the housing market trough is in sight, Maury Harris, managing director and chief economist at UBS Investment Bank, said that he sees “housing bottoming out in the first half of 2008 and starting to pick up in the second half of the year.”

The last time a housing recession was this serious was in the mid-1960s, Harris said, but the big difference between then and now is that “the Fed is not dealing with inflation.”

Like Seiders, he sees the federal funds rate dropping to 4.25 percent by year-end and holding steady through 2008.