NAHB: Housing Downswing Will Not Lead to Recession
Washington, DC, September 28, 2006 - Looking a bit rougher than the soft landing housing analysts had been expecting, the current housing downswing is unlikely to lead to economic calamity. That is largely because interest rates are historically low, the overall economy still is moving ahead, and builders are stepping up efforts to get their unsold inventories under control, according to economists participating in a teleconference hosted yesterday by the National Association of Home Builders (NAHB).
NAHB Chief Economist David Seiders said that he is forecasting an 11.5 percent decline in housing starts this year, followed by another 11.7 percent drop in 2007. Housing should hit bottom by the middle of next year, and will be approaching a demographically-based trend production level of about 2 million units in 2008 (including manufactured homes).
Following an unsustainable boom in housing starts, sales and price appreciation in 2004 and 2005, “we need a period of below-trend performance to work off excess inventory and improve housing affordability,” said Seiders. "Mortgage rates are dropping; builders and sellers are offering all sorts of incentives and upgrades, energy costs are retreating and the national economy is moving ahead, making it a very good time to buy a home."
Seiders said he is assuming that rates on 30-year mortgages will average about 6.5 percent for some time, pointing out that long-term interest rates have been “performing beautifully” since mid-year. The Federal Reserve will hold the federal funds rate at the current 5.25 percent into the first half of next year, he said, and probably will move it down to 5 percent by mid-2007.
Noting that housing is now a major source of weakness for the economy, Nariman Behravesh, Chief Economist for Global Insight, said that the “good news is that other sectors are doing reasonably well and will continue” to do so. Corporate cash flow is at record levels, and that capital will be used to invest in equipment and structures and create some new jobs, he said.
Although a soft landing is “no longer in the cards” for housing, Behravesh said that type of outcome most likely awaits the U.S. economy, with the gross domestic product growing 3.4 percent for this year, 2.2 percent next year and possibly slipping below 2 percent for a few quarters ahead. He agreed with other teleconference participants that a slowdown, or even a decline, in home price appreciation will reduce the wealth effects from home equity, but the impact on consumer spending and the spillover to the rest of the economy should be relatively modest.
During the recent boom, inflation-adjusted housing prices rose to record levels, and the market is paying the price for that rapid ascent now, with “prices coming down of their own weight,” Behravesh said. The current housing downturn “was not triggered by a substantial increase in mortgage rates, which didn’t go up that much and are down now and low by historic standards, putting a floor on the housing market.”
Looking at fundamentals such as demographics and income growth, housing prices in 70 of the 300 metro areas that his company and National City Bank survey quarterly are overvalued, Berhavesh said, by an average of 30 to 35 percent. Located primarily in the Northeast, Florida and California, these markets can expect to see some downward price adjustments. In Boston, for example, prices could drop 15 percent over the next year or two. At the same time, such cities as Chicago or Houston, where the large run-up in home prices didn’t occur might see continued appreciation at low levels.
Behravesh predicted that prices could drop 5 percent nationally over the next year. “To bring the markets back into equilibrium,” he said, “we need sluggish growth in prices for three, four, five years. We have to have home prices rising less than the rate of inflation to get things back into equil
