You will be able to hear a nail drop in new housing developments in the United States for at least another year as the homebuilding industry absorbs an enormous surplus of unsold homes, according to several economists at the National Association of Home Builders (NAHB) 2007 Fall Construction Conference.
The record inventory of 1 million single-family homes for sale is left over from the unsustainable binge of new home construction from 2004 to 2006, when builders cranked out new homes at a record pace and mortgage companies lured new homebuyers to the market with questionable loans.
David Seiders, NAHB’s chief economist and senior staff vice president, expects the housing market to “hit some bottoms” in 2008. He says home sales should start to recover in the first quarter of 2008 and that sales of single-family homes may bottom out and start climbing again by the third-quarter 2008.
Neither Seiders nor the other economists at the NAHB Conference, held Oct. 24 in Washington, D.C., expect the housing market to lead the U.S. economy into a recession, even though housing-related business accounts for 10 percent of all jobs in the United States. Seiders said there’s only a 33 percent chance of recession. Maury Harris, managing director and chief economist, UBS, New York, was more bearish, and said the likelihood of recession was 40 percent.
A major topic of conversation at the conference was the impact on the housing market and the overall economy from the default rate of the “subprime” loans that some lenders used to entice homebuyers. Many of these variable-rate loans are expected to start resetting at much higher interest rates this month, and Seiders and the other economists are concerned that many buyers won’t be able to handle the higher payments and will default. This impact won’t really be felt on a national scale unless thousands of homeowners start missing mortgage payments over the next few months and these loans go into foreclosure.
Seiders expects single-family housing starts to fall to 1 million in 2007 and 931,000 in 2008 before climbing to 1.05 million in 2009 and settling into a long period of healthy, sustainable growth in 2010. The single-family housing market peaked at 1.71 million starts in 2005. From its peak in 2005 to the expected trough in 2008, the total housing market (including multi-family homes) will have dropped 45 percent, highlighting the cyclical nature of the business. “Once we get past this mess, the long-term potential for the housing market is very, very good,” he says.
While the conference’s short-term housing outlook didn’t thrill the home builders, manufacturers, mortgage bankers and other building professionals in attendance, those attendees with a more optimistic perspective came away from the meeting feeling good that the economists at the conference didn’t think a recession is imminent.
Maury Harris of UBS said as long as consumer spending maintains its steady pace, non-defense capital spending (excluding aircraft) remains fairly solid, and unemployment and inflation are manageable, the U.S. economy should ride through the housing market’s doldrums. He said the Federal Reserve Bank could step in and cut the interest rates by a half-percent by 2008 if it senses any economic trouble.
Michael Moran, chief economist, Daiwa Securities, New York, also was optimistic about the U.S. economy and pegged the chance of recession at 30 percent. He said consumers are still spending and that they are for the most part enjoying the “wealth effect.” “The household balance sheet is in good shape,” he said. “Debt has gone up, but so have assets.”
While Moran didn’t want to understate the seriousness of the subprime loan crisis, he said its impact was due at least in part to the media over-reporting the issue. These loans only make up 12 percent of all residential mortgages, he said.