Economic forecasters trying to predict the path of the housing industry each month find themselves making major revisions to their projections, not just minor changes, says one such economic soothsayer.
John Burns, president of John Burns Real Estate Consulting, says that he updates his economic projections every two or three months, whether the market is good or bad. But things have been different this year.
“We are usually fine-tuning and not making substantial revisions like we are today,” Burns says.
Factors negatively impacting the housing industry as of mid-August, according to Fannie Mae chief economist David Berson, include: liquidity problems in the mortgage market, investors continuing to leave certain markets, low affordability in many markets, and slower job growth nationally, with some outright declines in parts of the Upper Midwest. Berson adjusts his forecast monthly.
Burns says that despite accounting for ARM loans that had already been made (and were likely going to reset at rates beyond what borrowers could afford), and price cuts by large builders beyond what small builders could afford to keep pace with, his bearish January forecast had to be reworked to reflect further negativity in the market.
“The severity of the correction has been much steeper than we thought this year, primarily due to subprime loan defaults that began occurring even before the borrowers saw their payment reset or their home drop in value,” Burns says.
In his July 25 Mid-Year Housing Forecast, David Seiders, NAHB chief economist, said a clear market view may be a ways off, as foreclosures and rising default rates in loans taken out in '05 and '06 are just beginning.
“We're still dealing with those problems, and it does create massive uncertainties about where we're going,” Seiders said.
The current lack of visibility surrounding where the housing market is headed, and what the economics of the situation might look like, is so dire that Fannie Mae has placed a gag order on its economists in order to avoid roiling “the market any further with speculation,” according to Eileen Fitzpatrick, Fannie Mae's senior communications specialist.
Despite all the negativity about current market conditions, housing is a cyclical business. Far more money is made during the good times than is lost during the bad times, says Burns.
“The smart builders are planning for a prolonged collapse in the resale market and making their decisions accordingly,” Burns says. “Keep your head up and save your company as much as you can so you can make your company millions in the future.”