Washington, DC, May 1, 2006--After soaring to record levels for three consecutive years, the single-family housing market is gliding toward a “soft landing” in 2006, as rising interest rates, affordability issues and a reduced role for investors/speculators contribute to a softening in demand, according to economists at the National Association of Home Builders (NAHB) Construction Forecast Conference in Washington, D.C. on April 27.
“After topping out in the third quarter of last year, it is pretty clear that the housing sector is in a period of transition. Sales and starts are trending lower toward more sustainable levels,” said NAHB chief economist David Seiders. Even so, the slowing housing market is not likely to derail the expansion as housing yields its position as the economy’s major growth engine to other sectors, he added.
Expressing a similar assessment, Michael Moran, chief economist at Daiwa Securities America Inc., said: “The housing sector is going through an adjustment, not a collapse.”
Taking a bullish view on the current economic and inflation outlook, Jim Glassman, managing director and senior policy strategist with JP Morgan Chase & Co., said these factors will bode well for housing.
“Real estate is pricing itself back to reality and in the long-run it is reasonable to expect starts in the 1.8 million to 2 million range,” said Glassman. “Housing won't continue to make the same contribution to the economy that it has. But when I think about where the economy is, I think we're in the fifth inning with a good chance of going into extra innings. This expansion may prove to be the longest one ever seen.
“Inflation is key to the longevity in the current economic expansion and to the underlying health of the building business,” he said, noting that Federal Reserve Board policymakers are doing an excellent job of keeping inflation in check.
Economists agreed that the Fed will raise its benchmark short-term rate to 5 percent at its May 10 meeting, which would be the 16th consecutive quarter-percentage point increase since the Fed started lifting it from 1 percent in June of 2004.
Both Seiders and Glassman believe the 5 percent mark should be enough to ease inflationary pressures in the months ahead and to keep the Fed from moving forward with additional rate hikes. However, citing higher energy prices and a low unemployment rate of 4.7 percent, Moran predicted that the central bank won’t stop until it raises the federal funds rate to 5.5 percent.
Looking to the future, Seiders said that new home sales in the first quarter of this year were down 10 percent from the fourth quarter in 2005, and that he expects them to ease further in the coming months before leveling off in 2007.
NAHB is forecasting that new home sales will hit 1.13 million units in 2006, down 12 percent from last year’s all-time high of 1.28 million units, and then move down slightly in 2007 to 1.09 million.
“Hopefully, most of this decline will be due to investors and speculators stepping out of the market. What we don’t want to see is investors dumping homes on the market,” said Seiders.
After posting a record 1.716 million single-family starts in 2005, NAHB is predicting that new home construction will level off to 1.595 million units in 2006 and 1.488 million in 2007, which would still rank high by historical standards.
Commenting on the dramatic home price increases in many markets in recent years, Seiders said home price appreciation is expected to fall from an average 12 percent in 2005 to about 4 percent in 2007 and that mortgage rates should move up to 6.7 percent later this year.
