Housing decline to bottom out in mid-2007, says industry group

Marketwatch - September 13, 2006 7:16 PM ET



WASHINGTON (MarketWatch) -- A downswing in home sales and building should bottom out sometime during the middle of 2007 before recovering in the latter part of 2008, a home-building industry economist said Wednesday.

In the meantime, said another economist, consumers shouldn't expect a "widespread" bust in home prices as some of the strength begins to dwindle from regional housing markets.

The National Association of Home Builders' David Seiders and the Federal Deposit Insurance Corporation's Richard Brown were among four economists testifying Wednesday before two Senate Banking subcommittees' hearing about the housing bubble and its implications for the U.S. economy.

All four -- including analysts from the National Association of Realtors and the Office of Federal Housing Enterprise Oversight -- agreed housing activity is slowing. Economists added the slowdown poses some risks to the U.S. economy but that a drop-off in activity isn't nationwide.

Seiders said a "below-trend" performance for home sales and building is likely over the next two years.

"The downswing in home sales and housing production should bottom out around the middle of next year before transitioning to a gradual recovery that will raise housing market activity back up toward sustainable trend by the latter part of 2008," Seiders told the subcommittees in prepared testimony.

Brown, meanwhile, told senators that historically, widespread price busts haven't necessarily followed price booms.

But, he cautioned, today there are more boom markets than in the past, and more consumers who have borrowed using "nontraditional" mortgage products, like interest-only loans.

"Borrowers who took on nontraditional loans as a means to afford a more expensive home may be particularly vulnerable to adverse housing market conditions," Brown told the subcommittee in written testimony.

Mortgage applications up

Meanwhile, as the economists were acknowledging a slowdown in housing, another industry group was reporting that mortgage applications were up in the last week.

The number of applications for mortgages filed with major U.S. banks rose a seasonally adjusted 3.2% last week, the Mortgage Bankers Association reported Wednesday. See full story.

However, application volumes are still down 22.8% compared with the same week a year ago, in line with other data showing the nation's housing market cooling significantly. But applications have rebounded in recent weeks.

Applications for mortgages to purchase homes rose 5.3% on a week-to-week, seasonally adjusted basis, while applications for refinance loans increased 0.1%, the MBA's data showed.

The economic impact of the housing slowdown will vary by region, economists noted. Tom Stevens, the Realtors' president, said solid job growth in Florida, California, Arizona and other states should keep price declines short-lived "as new job holders provide demand and support for the housing market."

Overall, the impact of a slowing housing market on the nation's economy may be comparatively muted, said Seiders.

"The downswing in home sales and housing production will continue to detract from overall economic growth through mid-2007," Seiders testified.

"However," he said, "much of this negative impact should be offset by strengthening activity in other sectors of the U.S. economy, keeping GDP growth reasonably close to a sustainable trend-like performance."

Home price growth slows

Home prices grew at their slowest pace in six and a half years during the second quarter of the year, recently released government figures show.

Last week, the Office of Federal Housing Enterprise Oversight reported that home prices increased at a 4.7% annual rate during the second quarter. Prices had risen at an 8.8% annual rate in the first quarter and peaked at a 17.8% annual pace in the third quarter of 2004. See full story.

Ofheo director James Lockhart said the data are "a strong indication that the housing market is cooling in a very significant way."

Earlier Wednesday, Lockhart once again pressed Congress to pass reforms on Fannie Mae (FNM) and Freddie Mac (FRE), the two giant government-sponsored housing enterprises that are major sources of money for U.S. homebuyers. See full story.

Lawmakers have been working to fashion new rules following accounting scandals at both companies. Among the reforms being sought are a new regulator that would have authority to approve the issuing of new products by Fannie and Freddie, and a limit on the amount of mortgage-backed securities each company may hold. Some lawmakers and the Bush administration are concerned that the $1.4 trillion in securities held by the companies is too large and poses a risk to the U.S. financial system.

Congress's reform effort has been stymied and faces uncertainty as lawmakers prepare for elections in November.

Echoing Lockhart, Ofheo's chief economist told senators Wednesday that healthy housing markets could "soften seriously" from unexpected disruptions at Fannie and Freddie. "While both companies have made progress [on reform], much more needs to be done," said economist Patrick Lawler.