In what has become a mid-year ritual, housing economists have quietly trimmed their annual forecasts after a lackluster start to the year, pushing back a housing recovery until 2012.
As the year began, the consensus opinion among housing economists was that a housing recovery might begin late in 2011, as the economy produced more jobs, excess housing inventory was burned off, and consumer confidence improved. Weak economic growth during the first part of the year, coupled with a double-dip in home prices, have led to a reassessment of that view.
The National Association of Home Builders recently revised its 2011 forecast down to a meager 2% increase in starts, a view that is shared by the forecasting firm IHS Global Insight. Wells Fargo is calling for only a 5% increase in starts. Freddie Mac remains among the most optimistic, calling for starts to rise 7% this year.
The most bullish forecast comes from Moody's. Chief Economist Mark Zandi, who spoke at last month's Housing Leadership Summit, believes that a housing recovery isn't far off, based on record corporate earnings, improved mortgage delinquencies, and greater certainty about federal tax and fiscal policy.
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Patrick Newport, chief U.S. economist for IHS Global Insight, points out that based on permit activity housing is showing weakness throughout the country. In his mind, the market is being stifled by a set of common problems, "including tighter lending standards for builders and home buyers, rising commodity prices, and uncertainty over the direction of the economy and of house prices."
A second decline in home prices, which had appeared to stabilize last year, has debilitated the housing market. The 4.1% fall in existing-home prices during the first quarter, as measured by the S&P/Case-Shiller index, caught most housing economists by surprise. The fear of paying too much for a home that might immediately lose value is no doubt keeping some people from buying.
Meanwhile, economic growth also took a step back in the first quarter, rising at a meager 1.8% clip, down from 3.1% in the fourth quarter of last year. Perhaps the worst news for housing came at the beginning of June, when the Commerce Department reported that the economy only managed to create 50,000 new jobs in May. That was less than half the average monthly rate of job creation during the first 14 months of the economic recovery.
Despite weak payroll gains, some economic factors that formerly conspired against housing activity are now working in the industry's favor. The percentage of mortgages 90 or more days past due, the ones entering foreclosure, has been declining for six months, according to data kept by the Mortgage Bankers Association.
Another positive metric that housing economists have picked up on is that households are working down their debt levels. Once their net worth returns to historical levels, which may happen in the fourth quarter of 2011 according to an NAHB analysis, they will be in a better position to start spending money on housing again. Household net worth rose 1.2% in the first quarter.
David Crowe, the chief economist for NAHB, holds out hope that new home sales will pick up late this year, followed by an increase in starts. "The slow beginning in 2011 will keep the total year from being any better than 2010, but there will be some growth later in 2011 leading to great movement in 2012."
Most housing forecasts call for a big increase in housing starts next year. The average of five prominent housing forecasts comes to about a 40% increase, which would be roughly in line with the bounce-back years of 1976 (32.5%), 1983 (60.3%), and 1992 (18.3%), which followed a milder recession than the most recent one.
"We've built up substantial pent-up demand," says Crowe, who estimates that at least 2 million households have delayed forming in recent years due to economic conditions. "Once consumer confidence comes back, there should be some movement to regain the lost household formations and delayed moves."
Tight credit and a surplus of existing homes will make it different this time around, Crowe acknowledges. Also, it won't help matters that some of the biggest home building states historically—California, Florida, Nevada, and Arizona—are hurting more than others. "The recovery is likely to be more reliant on multifamily rental and first-time home buyers," says Crowe.
Boyce Thompson is editorial director for Builder.
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