THE NAHB'S FORECAST SHOWS A “SOFT LANDING” for the U.S. housing market in 2006 and 2007, following record levels of activity in the single-family and condo markets in 2005. However, the landing will feel pretty rough in some areas of the country—including places that soared into the stratosphere in 2005 as well as places that never even lifted off after the national economic recession of 2001.
SOFT LANDING The NAHB's national housing forecast shows a moderate and orderly cooling-down process from the highs of last year. Both the former Federal Reserve chairman, Alan Greenspan, and the current chairman, Ben Bernanke, basically concurred with this view in public statements issued in May.
The national soft landing scenario views the evolving housing slowdown as a downward adjustment from unsustainable rates of activity rather than as a classic cyclical contraction. With respect to causes, the evolving slowdown reflects affordability problems caused by increases in the interest rate structure on top of years of rapid home-price appreciation, as well as a pullback by the investors/speculators that had spurred the market to new heights last year. As I have discussed in recent columns, investors/speculators not only have been cutting back on new purchases, but they also have been canceling sales contracts and reselling single-family homes and condo units already closed on.
HIGH FLYERS The national housing boom was concentrated in markets located in the West, the Northeast corridor, and Florida. These high-flying markets generally were fueled by strong growth in population and employment. However, stringent land-use controls limited housing supply in many of these areas, provoking outsize increases in house values. In turn, this price response attracted hordes of investors/speculators eager to share in the capital gains, and their presence drove prices even higher.
But many of the high-flying metro markets are heading back to earth, and a pullback by investors/ speculators is hastening the process. Rough landings for single-family and/or condo markets are possible in such places as Las Vegas, Phoenix, Washington, Miami, and Orlando, Fla. Furthermore, bumpy conditions are developing in other parts of the Northeast corridor, in other Florida markets, and in much of California.
EARTHBOUND The national economic expansion has left some parts of the country far behind, and housing markets in those areas face downward pressures that are entirely different from those faced by the high-flyers.
The earthbound housing markets are in structurally weak economies concentrated in the Great Lakes portion of the Midwest, in New England, and in the storm-ravaged Louisiana-Mississippi area. Michigan and Ohio are the weakest parts of the Great Lakes region. Their labor markets contracted dramatically during the 2001 recession, and employment levels still remain well below their pre-recession peaks.
The structurally weak economies have little hope of rebound in 2006–2007. Furthermore, rising interest rates now are weighing on them, and the Federal Reserve has no way to regionalize the impacts of monetary policy.
While builders in these earthbound markets don't have to deal with the violent swings of investors/ speculators, weak fundamentals loom large. This reality has prompted geographic diversification by a number of larger companies headquartered in places such as the industrial Midwest.
For detailed NAHB forecasts by state and metro area, go to www.housingeconomics.com.
Chief Economist, NAHB Washington, D.C.
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