Real Estate News

Housing Downswing Expected to Bottom Out by Mid-2007, Builders Tell Congress

National home price appreciation is expected to remain relatively flat for the future

RISMEDIA, September 14, 2006—The National Association of Home Builders (NAHB) told Congress that the current downswing in home sales and housing production following the record housing boom of 2004-2005 is expected to bottom out around the middle of next year and gradually move back up toward trend by late 2008.

Testifying before the Senate Economic Policy and Housing and Transportation Subcommittees, NAHB chief economist David Seiders said that while the housing downswing still has some distance to go, "various economic and financial market fundamentals figure to be supportive of housing demand for the foreseeable future."

These fundamentals include the following:

• Payroll employment is proceeding at a decent and sustainable pace.
• Household income growth is strengthening as the economic expansion proceeds.
• The interest rate structure is favorable, mortgage credit is readily available and monetary policy has stabilized following a long run of upward rate adjustments.
• Energy prices have receded from record highs earlier this year.

Seiders also told lawmakers there are several downside risks to the housing and economic outlook he presented. These include the possibility of spikes in interest rates or energy prices, a large resale of homes back onto the markets by investors/speculators and uncertainties regarding the size of the inventory overhang in the market for new homes.

There also are considerable uncertainties about the impacts on consumer spending from a fading housing wealth effect as well as from the impacts of "payment shock" on home owners facing upward adjustments to monthly payments on "exotic" types of adjustable-rate mortgages (ARMs).

The record housing starts and sales of the past two years were well above levels supportable by demographics and other fundamental demand factors, and were fueled to a great extent by investors and speculators seeking to make a quick profit and through the surge of unconventional ARMs, according to Seiders.

"In retrospect, it was the finance- and price-driven acceleration of buying for homeownership and for investment that drove housing market activity into unsustainable territory during the boom," he said.

After posting double-digit gains during the past two years, national home price appreciation is expected to remain relatively flat for the foreseeable future. "Indeed, some decline is a distinct possibility, and the rate of price appreciation should remain below trend for some time," said Seiders.

NAHB's forecast has a cumulative shortfall of housing starts of roughly 400,000 units from the middle of this year through the end of 2008, in line with the estimated excess supply generated during the recent boom period.

And while the current downswing in home sales and housing production will continue to detract from overall economic growth through mid-2007, Seiders said that much of this negative impact should be offset by strengthening activity in other sectors of the U.S. economy (spending on capital equipment and software, nonresidential structures and exports).

Source: National Association of Home Builders

RISMedia welcomes your questions and comments. Send your e-mail to: realestatemagazinefeedback@rismedia.com