June 7, 2007
By David F. Seiders
NAHB Chief Economist
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Fed Chairman Addresses the Housing Market, Subprime Lending
On June 5, Federal Reserve Chairman Ben Bernanke addressed via satellite the 2007 International Monetary Conference in Cape Town, South Africa. Bernanke’s choice of topics in his address accentuates the importance of the U.S. housing market in the global economy as well as the importance of the subprime mortgage issue in global financial markets.

His comments on the current condition of the U.S. housing market and the near-term housing outlook were a bit more sobering that other recent Fed statements on housing.

Bernanke stressed that the downward adjustment in the housing sector “is still ongoing,” and he allowed as how the contraction in residential construction “now appears likely to remain a drag on economic growth for somewhat longer than previously expected.”

Bernanke pinned large responsibility for the recent weakening of housing demand on the subprime-related turmoil in the mortgage market, and he noted that recent subprime developments “add somewhat to the usual uncertainty in forecasting housing demand.”

He went on to say that the subprime-related problems “will serve to restrain housing demand, although the magnitude of these effects is difficult to quantify.”

We couldn’t agree more with that assessment, although we have to go on record with our forecasts.

Builders Are Facing Reluctant Home Buyers
The subprime-related tightening of mortgage lending standards certainly has pushed large numbers of prospective home buyers back to the sidelines, and the timing of their return to the market is highly uncertain.

There also has been widespread reluctance among consumers who have good access to credit to go ahead with home purchases at a time when affordability remains well below conditions prevailing prior to the 2004 to 2005 housing boom. There are plenty of new and existing homes to pick from and home prices are weakening in many areas.

Consumer perceptions of the direction of home prices are central to the difficult market conditions now encountered by builders.

Projections of rising house prices strengthened demand during the 2004 to 2005 boom, even as rising prices were taking a toll on current affordability conditions, and projections of falling house prices now are weakening demand even as falling prices are supporting current affordability conditions.

Most builders have never had to deal with such a maddening reality before, and the frustration level definitely is mounting, according to our monthly surveys of single-family builders.

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Builders Are Pulling Out the Stops
In May, NAHB conducted a nationwide survey of single-family builders to track the kinds of incentives being offered to bolster sales and limit cancellations, and we also solicited builders’ assessments of the degree of success being achieved.

On the home price front, we found that 52% of builders had reduced prices during the previous month. For those cutting prices, the average reduction was 7% — similar to the magnitudes revealed by a series of surveys conducted by NAHB since mid-2006. Nearly three-fourths of builders said their price cuts were at least somewhat effective in bolstering sales or limiting cancellations.

Nearly three-fourths of builders in our May survey were offering nonprice sales incentives of various types, sometimes in combination with price cuts. The most frequently offered incentives were:

  • Include optional items in homes at no cost.
  • Pay closing costs for buyers.
  • Absorb up-front mortgage finance points.
  • Buy down mortgage interest rates.
  • Help buyers sell existing homes or offer trade-in programs.

High proportions of builders rated all of these incentives as at least somewhat effective in bolstering sales or limiting cancellations.

A small percentage of builders also said that they had offered to match price reductions on future sales of the same models in the same communities. Despite the logical appeal of this sales incentive, only about half the builders making such an offer said it was an effective measure in dealing with reluctant prospective buyers.

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Housing Will Be a Drag on the Economy Throughout 2007
NAHB’s current forecast shows a slight upturn in sales of new and existing homes by the fourth quarter of this year. The forecast also shows a modest increase in total housing starts by the first quarter of 2008, following a resounding 36% decline from the cyclical peak in the first quarter of 2006.

Our projections for home sales, housing starts, manufactured home shipments and residential remodeling result in stabilization of real Residential Fixed Investment (the housing production component of GDP) by the end of this year and lead to modest positive growth by the first quarter of 2008.

While the projected drag on GDP from RFI now extends throughout 2007, the drag eases off considerably during the second half of this year — allowing GDP growth to approach a sustainable trend pace as 2007 draws to a close.

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The Housing Upswing May Be a Long Climb Back to Trend
The projected beginnings of the housing recovery in the early part of 2008 represent small steps back toward our estimate of the demographically based trend of housing production — close to 2 million new housing units per year, including about 1.85 million conventional housing starts. After all, the inventory overhang will be relatively heavy for some time and the swing of the mortgage credit pendulum still will be weighing on effective demand, keeping the initial stages of recovery rather modest.

It’s also worth noting that the unique nature of the current boom-bust housing cycle pretty much rules out strong forces that traditionally have lifted housing production briskly out of cyclical troughs.

These forces usually have included large declines in the interest rate structure, including aggressive monetary ease by our central bank, and strong growth in payroll employment as the economy gets into an expansion mode.

We’re expecting a supportive interest rate structure and decent job growth this time through, but the absence of the traditional strong growth engines will help keep housing production below the trend level for several years beyond the trough.

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Spring Construction Forecast Conference Discussions Now Available on the Web
The Webcast of the Construction Forecast Conference — Spring 2007 held in Washington, D.C. on April 26 now is available for purchase.

Those interested can purchase the conference Webcast, which includes panels of nationally recognized experts discussing economic trends, government policies, developments in the housing industry and the results from NAHB's recent surveys.

Purchasers will receive unlimited access to the Webcast archive for three months, as well as electronic copies of the conference handouts and presentation material. Purchasers can watch at their own pace, rewind, fast forward and review important sections.

To Purchase the Webcast

To purchase the Webcast, visit www.nahb.org/cfcwebcast.

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Want to Know the Housing Forecast for the Top 100 Metros?
Find out in HousingEconomic.com’s 2007-2008 Metro Forecast (free preview). Get the metro forecast with in-depth analysis, overviews and downloadable Excel tables.

To learn more, visit www.HousingEconomics.com.

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For more information or to contact us directly, please visit www.NAHB.org l ©2007, National Association of Home Builders

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