THE DRAMATIC DOWNWARD CORRECTION IN U.S. housing markets has been underway for roughly two years. In this regard, the NAHB's single-family Housing Market Index (HMI) hit a current-cycle low of 28 in June, down from a high of 72 in mid-2005. The HMI was down by more than 50 percent in all four regions of the country, and all three component measures (current sales, expected sales, and traffic of prospective buyers) had values less than half their 2005 peaks.
Despite the stunning dimensions of the housing correction to date, the single-family housing market still is coping with two major imbalances. First, affordability remains historically low, a problem that's been aggravated by tighter lending standards in connection with the subprime mortgage debacle. Second, inventories of vacant homes for sale (new and existing) have climbed to record highs, boosted by homes put back on the markets by investors and speculators that gobbled them up during the 2003–2005 boom.
In June, the NAHB conducted a nationwide survey of more than 400 single-family builders to gauge market momentum at midyear and to identify builders' production plans for the second half of the year. The signals from this survey have been incorporated into the NAHB's housing starts forecast for 2007, and the outlook for 2008 has been influenced as well.
MIDYEAR MOMENTUM The NAHB survey asked builders to rate housing market conditions in June, as compared to the recent past. Although 39 percent of respondents said that market conditions were stabilizing, 43 percent said things were still declining and only 9 percent said the markets were improving (the rest were not sure).
The assessment of market momentum in our June survey actually was less optimistic than an assessment garnered from a similar survey conducted earlier in the year. It's clear that the tightening of mortgage market conditions in the wake of the sub-prime debacle contributed heavily to the deterioration of builder views of housing market momentum at midyear. Indeed, 45 percent of builders in our June survey said that tighter lending standards were taking a toll on home sales, and 28 percent said tighter standards were raising sales cancellations.
PRODUCTION PLANS Two-fifths of the builders said they plan to start about the same number of units in the second half of this year as in the first half. But 36 percent said they plan to start fewer units in the second half, and only 23 percent said they plan to start more. A relatively high proportion of larger companies (those starting more than 100 units per year) said they plan to start fewer units in the second half.
Furthermore, 37 percent of respondents said they had recently revised downward their production plans for the second half of the year, and only 13 percent said they had recently revised their plans upward; the other half had not done a recent revision. Again, a relatively large share of the larger companies (55 percent) had recently revised their plans downward.
THE OUTLOOK The patterns of responses to our midyear survey point toward some further erosion of single-family starts during the second half of the year. The NAHB's current forecast for the second half shows a 4 percent decline from the first-half's pace, with single-family starts bottoming out in the fourth quarter at an annual rate of 1.1 million units—37 percent below the quarterly peak for this housing cycle. We're projecting a modest recovery in 2008, leaving plenty of room to grow in 2009 and beyond.
CHIEF ECONOMIST, NAHB WASHINGTON, D.C.