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Latest Housing Sector Forecasts

It’s been a while since I published a post on the U.S. housing sector. However, with Federal Reserve Chairman Ben Bernanke calling attention to housing’s drag on the U.S. economy in his semiannual testimony for the House of Representatives Financial Services Committee, I thought we’d take a look at some of the latest forecasts. According to David Berson, vice president and chief economist at Fannie Mae, the U.S. housing market slump will continue throughout the remainder of 2007, with home sales falling further and price growth continuing to slow. The leading industry economist predicts that 2006 and 2007 combined will show the biggest drop in sales since the housing downturn of 1989-91. According to Reuters on Wednesday, Berson said, “If you combine the drop in affordability, the slowdown in job growth, the still-good demographics for housing and the continued pull-out of investor demand, we expect housing activity to continue to fall this year.” In addition, mortgage rate increases will soon have an additional negative impact on housing demand, said Berson in the company’s 2007 Economic and U.S. Mortgage Market Outlook conference call. He predicted that the housing market should bottom at the end of this year with a small increase in demand in the second half of 2008. However, housing starts will continue to fall through 2007 and perhaps into early 2008.

Reuters also spoke to Jeffrey Mezger, chief executive of KB Home (the number 5 U.S. home builder), who expects the overall U.S. home market to bottom out at the end of 2008. with prices not increasing until well into 2009. Earlier today, Mezger said, “By the end of ‘08 it will start to stabilize. Then it will start to go back up on in ‘09. I think it will take a year.” He feels that the oversupply of existing homes on the market is the main reason for housing’s weakness. “The bigger factor to me is how many of the markets have this huge resale inventory that has to clear and is going to keep pressure on pricing,” Mezger told Reuters. “If they do by the end of ‘08 you’ll start to see some traction in demand and supply in balance.”

Paul McCulley, a bond fund manager at Pacific Investment Management Co., goes so far as to suggest that the housing slump’s impact on the broader U.S. economy will be so significant that it will force the Federal Reserve Bank to cut rates. McCulley told Bloomberg today that, “The recession we have in the housing market is going to be a very long, protracted affair. That’s going to lead the average consumer to recognize that he needs to save more out of current income, which is going to weaken consumption in the economy.” He also suggested that the subprime mortgage losses will spread beyond financial markets. He said, “This whole subprime crisis has been more of a Wall Street event than it has been a Main Street event, but that’s going to change. You’ve got overpriced homes and inventory that’s half the distance to the moon. Nationwide deflation in home prices will follow.” McCulley suggests that companies marketing mortgage-linked bonds are the culprits. “The first sin was created on Wall Street. Wall Street created the demand for originators to create this crap type of mortgage product.”