Economists: Housing Turnaround to Begin In 2008

Washington, DC, October 26, 2007--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 on Oct. 24 said they expect the industry to bottom out and to start turning around in next year.

Although the market is still declining,  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 because 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 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 cut rates again before the end of the year, bringing the federal funds rate down to 4.25%.

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% decline.

Total housing starts are expected to register 1.363 million in 2007 and 1.2 million next year, an 11.9% 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.

“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.”