Home buyer demand fell dramatically after mid-2005 as deteriorating affordability conditions moved many prospective homeowners to the sidelines (or into rental housing) and declining prospects for price appreciation sent many investors/speculators scurrying away from the housing sector.
Recent changes in economic and housing market conditions have laid the foundation for a rebound in home buying, but large inventory overhangs in many parts of the country show that builders in those areas should not yet ramp up starts of new single-family or condo units.
STABILIZING FORCES Home sales trended sharply downward through the third quarter of this year. However, a number of key economic and housing market developments are now working to stabilize housing demand. These include recent declines in mortgage interest rates, recent declines in energy costs, maintenance of low unemployment, and healthy growth in household income. A dramatic falloff in house-price appreciation during the past year, including some dips into the negative range, also is helping to revive housing demand. And home sellers (particularly home builders) have been offering a plethora of nonprice sales incentives to bolster home sales and limit sales cancellations.
The adjustments to mortgage rates, house prices, and household income have combined to halt a dramatic decline of housing affordability, and affordability conditions actually perked up in both August and September from a 20-year low in July. Furthermore, the expectations components of key measures of consumer confidence/sentiment picked up in October, and consumers' assessments of home buying conditions improved as well.
In view of these welcome developments, the NAHB's forecast anticipates only modest further declines in sales of new and existing homes during the fourth quarter of this year, and we expect sales to bottom out in the first quarter of 2007 before embarking on a gradual recovery process.
INVENTORY OVERHANG Unsold inventories of new and existing single-family homes moved down a bit in August and September, coming off record highs, and the inventory of existing condo units came down a bit in September from its record high. However, inventories still are historically high, and the official government numbers exclude the impact of large numbers of sales cancellations in the market for new single-family homes. Furthermore, there is no measure of the unsold inventory of new condo units, and that overhang is presumably quite heavy in many areas.
Inventories naturally will be worked down as sales volume picks up next year, but the size of the overhang suggests that builders should carefully analyze local market conditions before ramping up new production. The NAHB's forecast shows housing starts bottoming out in the second quarter of 2007 on a national basis, somewhat later than the projected trough in home sales. This kind of correction will definitely be needed to bring housing supply and demand back into reasonable balance.
HOUSE-PRICE BEHAVIOR House-price appreciation contracted dramatically during the past year, and median sales price movement for both new and existing homes slipped into the negative range during the third quarter of this year. Some of this contraction reflected compositional shifts, as sales of high-priced homes fell more than sales of lower-priced homes. The NAHB's forecast of the government's quarterly repeat-sales House Price Index (following the same houses through time) shows an orderly deceleration through mid-2007 followed by a few negative quarters. That means the supply-demand balance is not likely to be fully restored until 2008.
CHIEF ECONOMIST, NAHB WASHINGTON, D.C.