One of housing's leading economists predicts that if overall economic trends ease back only slightly in the coming months and production home builders continue to tap the breaks on starts, the new-home economy will walk the tightrope between a soft and sharp landing.

But if the economy stumbles, leading to job losses, housing's outlook becomes grimmer, more like the recession years of 1990–1991, says Eric Belsky, executive director of Harvard University's Joint Center for Housing Studies. “It looks more like a slowdown than a downturn,” says Belsky. However, he notes that the trend appears worse than the mid-1990s blip but better than some of the past two decades' full-fledged housing recessions.

Belsky's expects housing starts, an indicator of housing demand, to fall to a level between 1.80 million to 1.83 million in 2006 and then give up another 10 percent in 2007, lowering starts to between 1.6 million and 1.7 million. But by this time next year, things will start to brighten again for new-home builders, Belsky told attendees of Hanley Wood's American Housing Conference in Chicago in late September. Starts will edge up to 1.73 million in 2008 before heading toward 1.80 million in 2009.

In the meantime, big builders have to choke down new-home inventory's bitter pill. How and when they burn through their unsold-but-under-construction new homes matters, says Belsky. If the massive, publicly traded companies operating in overbuilt markets get too impatient and sell off inventory fast by slashing new-home price tags, things could get uglier. Existing-home prices also will suddenly and steeply turn south, and home buyers will see now as anytime but a good time to buy.

Belsky points out that the public builders know this fact is a trump card. For them, dramatic price cuts amount to little more than margin compression. They can do it without significant financial damage to themselves, given the beefy margins they have enjoyed for three years. But the collateral effect on housing prices, first in the bubbly markets and then nationwide, could both deepen and lengthen the downturn. “That's when the whole market seizes up,” says Belsky.