WASHINGTON - Though there appears to be no let-up to the current housing downswing, economists participating in the National Association of Home Builders Fall Construction Forecast Conference on Oct. 24 said they expect the industry to bottom out and to start turning around in 2008.

Acknowledging that there is definitely downward momentum in the market at this time, with starts, sales, prices and permits off, and problems in the sub-prime and Alt-A mortgage markets, NAHB Chief Economist David Seiders said that housing should nevertheless begin a modest recovery next year.

Despite the present market contraction, Seiders said that housing should begin to turn around next year for a number of reasons: the overall economy and job growth continue to move ahead at a decent pace, core inflation is under control, the late-summer credit crunch in mortgage markets is showing signs of easing since the Federal Reserve cut short-term interest rates on Sept. 18, and the supply-demand equation will be better balanced as builders begin to whittle down excess inventories.

He also noted that the evolving inflation picture gives the central bank latitude to enact more monetary stimulus to support the economy if conditions warrant. Seiders said he predicts that the Fed will cut short-term interest rates by another quarter of a percentage point when members of the Federal Open Market Committee meet on Oct. 31 and will enact a similar rate cut by year-end, bringing the federal funds rate down from the current 4.75% to 4.25%.

With the housing sector facing a large backlog of unsold inventory, Seiders said that starts and permits will not begin to move forward until sales firm up.

“Home sales should bottom out by the end of the first quarter of 2008, and I have starts up in the third quarter of next year, assuming the inventory overhang stabilizes,” Seiders said.

NAHB is forecasting 828,000 new single-family home sales for 2007 and 781,000 next year, a 5.6% decline. Seiders noted that the peak-to-trough decline in home sales from the boom years of 2003-2005 is more than 40%, and as sales begin to move slowly upward beginning in the second quarter of next year, they will still only be on par with levels recorded in the late 1990s.

Total housing starts are expected to register 1.363 million in 2007 and 1.2 million next year, an 11.9% decline according to NAHB projections. Single-family starts, Seiders said, are expected to show a 50 percent decline from their peak in the first quarter of 2006 to a trough in next year’s second quarter.

Agreeing that the housing market trough is in sight, Maury Harris, managing director and chief economist at UBS Investment Bank, said that he sees “housing bottoming out in the first half of 2008 and starting to pick up in the second half of the year.”

Taking what he characterized as a “less negative” spin on the housing market, Michael Moran, chief economist of Daiwa Securities America Inc., said that most of the reporting in the media is “exaggerated” and “sensationalized.”

Specifically, he cited the sub-prime mortgage arena, which makes up 13.5% of the market, as opposed to prime lending, which constitutes a 75% market share.

“Twenty percent of the sub-prime market is under stress,” said Moran. “Twenty percent of 13 percent is less than 3 percent of the total mortgage market. The economy should absorb this shock.”

From a regional point of view, Arizona, California, Florida, Nevada and the broader Boston and Washington, DC, metro areas will be most affected by the negative economic fallout from the sub-prime mortgage crisis, according to Mark Zandi, chief economist at Moody’s Economy.com. Also affected will be areas along the New Jersey coast, the Carolinas, and parts of the industrial Midwest. Regional economies in these areas, he predicted, will encounter more severe declines in construction and housing prices along with weaker consumer spending and significant job losses in housing-related businesses than other markets across the country.

Places that are experiencing the most significant weakening of economic activity at present include Phoenix, parts of central and southern California, Las Vegas and Reno, NV, as well as parts of Florida’s east and west coasts, said Zandi. He expects housing activity in these areas to bottom out in late 2008 “at best.”

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