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.
 

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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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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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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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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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.

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To learn more, visit www.HousingEconomics.com.

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