Builders Expect Housing to Improve in 2007

It is only a matter of time before housing begins to recover from its first major downturn in about 15 years, said industry economists at the International Builders’ Show in Orlando, Fla. Fundamental improvements in the marketplace could already be taking hold by this year’s second quarter.

“We knew we were in a correction process a year ago, and it was an inevitable occurrence following the unsustainable boom years of 2004 and 2005 when stimulative financing conditions and speculation from escalating home prices resulted in a ‘grossly overheating market,” said David Seiders, chief economist for the National Association of Home Builders (NAHB). “Indeed, the downward movements in sales and starts were even deeper in 2006 than expected.”

Even though Seiders said he expects starts to begin a “gradual recovery” following further erosion during this year’s first quarter, total housing production for 2007 is projected to slip a further 14.2 percent to 1.560 million. Single-family starts for the year are expected to decline 15 percent to 1.256 million.

New single-family home sales were down 16.4 percent in 2006 but apparently stabilized by the end of the year. Sales are projected by NAHB to decline only 1.3 percent in 2007 as activity rises gradually during the year.

Supporting an upward turn in new home sales, Seiders said, is today’s “Goldilocks economy.” This appears poised to sustain healthy levels of growth in Gross Domestic Product, jobs and income while core inflation recedes from levels that have been worrisome for the Federal Reserve Board. “The interest rate structure should be supportive of housing throughout this year,” he said.

While housing should be moving up before long, Seiders cautioned that it will be a couple of years before the industry reaches the two million (housing starts) annual construction pace (including 150,000 manufactured homes) that is sustainable over the long haul. This is the result of serious overbuilding during 2004 to 2005.

Agreeing that the housing market probably has seen the worst of the current slump in starts and sales, David Berson, chief economist of Fannie Mae, and Frank Nothaft, chief economist of Freddie Mac, said that they don’t expect to see the beginning of an upturn materialize until a quarter or two behind Seiders’ forecast. They say gradual improvement is likely in this year’s second half.

The housing affordability woes that reduced housing demand last year now seem to be bottoming out as incomes rise, home prices moderate and mortgage interest rates remain at favorable levels, said Berson. He further noted that housing demand won’t be a negative for the industry this year, and could be a small positive.

“There is still a bit of a rocky road and bumps ahead of us,” said Nothaft, but builders “are seeing some light at the end of the tunnel.” High housing prices have become the decisive factor behind the slowdown, he said, and “it will take time for affordability to improve.”

Nothaft added that national data have obscured local trends and there are some markets where home sales and price appreciation are “holding up well,” particularly in much of the South. On the other hand, some markets—such as California, Florida, and Massachusetts—have seen their business erode by 30 percent.

While single-family activity will improve as the year progresses and into 2008, “we won’t see a recovery in areas where the local economy is in recession,” Nothaft said, such as Detroit and parts of the Midwest.

DWM
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