Housing Recovery Predicted at Builders Show

Speaking at the International Builders' Show, an annual education and trade show that has attracted more than 100,000 housing indatustry professionals to Orlando, the economists diverge on the strength and pace of recovery for an economic sector that took a beating in 2006.

While National Association of Home Builders Chief Economist David Seiders predicted signs of recovery are imminent, economists for government mortgage underwriters Fannie Mae and Freddie Mac said the market has further to fall.

But the three agreed that sales and prices should be well into recovery by the end of the year.

"We don't think we've seen the bottom," said David Berson, vice president and chief economist for Fannie Mae.

Two problems will continue to keep home prices down and inhibit new construction, according to the experts.

Overbuilding during the red-hot real estate years of 2004 and 2005 produced a glut of unsold houses, about 400,000 nationally, according to Seiders. This surplus will prevent builders from producing more until the oversupply has diminished.

Selling those homes will depend on price incentives, Seiders added.

From free upgrades to mortgage concessions, "builders have been pulling out the stops to try to drive sales," he said.

Berson noted that widespread investor speculation in the housing market helped drive up prices to unsustainable levels as well as fuel the surplus in construction.

"We have to run through these inventories in order for home prices to stabilize," Berson said.

But demographic trends, including immigration and baby boomer retirements, suggest that homeowner demand ultimately will absorb the housing glut and stimulate a return to healthy levels of construction at the end of 2007 and into 2008.

"Core housing demand at minimum won't be a negative this year and may even be a small positive," Berson said.

Still, Berson warned, don't look for home prices to keep pace with inflation, and expect housing starts to remain low for the first six months of 2007.

"It will be healthy going forward for starts to continue to go down," Berson said.

Frank Northaft, chief economist for Freddie Mac, said stabilization of prices in the wake of investor flight from the housing market will ultimately help more U.S. families move into homeownership.

"House prices have shot up so much over the last year, it has really hurt affordability," Northaft said. He blamed investor activity for much of the increase, especially in markets such as Southern California, Florida and New England.

But Northaft said markets where investors have been less active and prices have risen more modestly — the Southeast in particular, from Texas to South Carolina — have weathered the housing market downturn comfortably and should see stronger recovery.

"If the local economy is doing well, that bodes well for housing prices and sales," Northaft said.

All this is not such good news for builders. Unsold inventory and price stabilization are pressing builders not to pass on growing building materials costs and forcing buyer incentives.

Seiders said almost 80 percent of the builders surveyed by the NAHB said they are using financial incentives to lure buyers.

"Builder margins have been taking it on the chin," Seiders said.