Washington, DC, May 1, 2006 (continued)--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.
NAHB Chief Economist David Seiders said that the multifamily market has remained “eerily stable” since the late 1990s, and is expected to continue the same pattern in 2006, with starts dropping slightly to 351,000 apartment units from 355,000 last year.
The rental market has solidified, and Seiders said he expects it to regain some ground while the red-hot condo markets start to cool. Seiders is also predicting that residential remodeling expenditures will continue on an upward trajectory, in part because "an immense amount of home equity will continue to support this spending."
The Regional Outlook
Looking at housing on a more localized level, Bernard Markstein, NAHB’s director of forecasting, said that the forces driving housing demand vary significantly by region. Among the forces affecting demand are home prices, population growth, household formation, and growth in employment opportunities. Other factors that can greatly affect demand include immigration and migration, energy prices, large-scale natural disasters such as Hurricane Katrina, and an area’s appeal as a second home location.
Mark Zandi, chief economist for Moody’s Economy.com, said that “builders have done a pretty good job of matching supply and demand” and that “nationally, house prices and supply will go flat in 2006, 2007 and 2008.” This implies that there will be some price declines in key markets, he said, but the markets are going to “correct, not crash.”
Markets where Zandi anticipates significant corrections—defined as more than a 10 percent peak-to-trough decline--are in the Northeast, the Mid-Atlantic, Florida, California, parts of Arizona, and Las Vegas.
“Any fundamental rise in interest rates will bite hard,” Zandi said. “The rise will lock out two key groups that are important to local/regional markets: first-time home buyers and investors (investors include second home buyers and other buyers in it for the long term, not just those in the market with the intent to flip and get out.
Addressing a question that has generated speculation in recent years, Thomas Lawler, a housing and mortgage market consultant who worked for Fannie Mae for 22 years, said “Was there a national bubble? Nationwide, no, but in some regions, absolutely.”
Lawler, who spoke on house prices and local dynamics, noted that in some areas, “all of the signs of a bubble were present: a surge in speculative investing; a surge in innovative financing; easy credit and loose underwriting; home inspection waivers; and home purchases sight unseen. You had to be ‘on something’ not to see a bubble in some areas,” he said.
With interest rates on the rise, housing finance was a major topic at the conference.
“Housing is the most interest rate sensitive industry in the country,” said Frank Nothaft, vice president and chief economist of Freddie Mac. “Mortgage interest rates, home prices and family incomes--these are the three ingredients that families think about when deciding to buy a home.
“We expect mortgage interest rates to rise slowly through the end of 2006, but they’ll still remain well below historical norms,” Nothaft said. “The affordability problem is a function of increases in home prices.”
He pointed out that among families with prime mortgages, 87 percent of the loans are fixed-rate. “So even if the Federal Reserve continues to raise interest rates, most American families will be insulated because they have fixed-rate mortgages.”
