SANTA BARBARA, CALIF. -- David W. Berson, chief economist for Fannie Mae is predicting a drop of 7 percent to 8 percent in new-home sales for the remainder of 2007 but says the worst declines have passed. Berson made his presentation Monday morning to more than 100 home building executives at the Presidential Seminar in Santa Barbara. The seminar is sponsored by Hanley Wood, LLC, parent company of BUILDER Online.

Berson says he agrees with former Fed chief Alan Greenspan's recent assessment that there is a chance that the nation could go into a recession.

"If we have a recession, it will be bad for the industry," Berson comments. "We better hope the economy keeps growing or things could get very bad."

He also predicts that housing starts will fall a lot more in 2007 than housing sales. The silver lining of starts falling is that inventory numbers will decrease. According to Berson, the state with the highest inventories is Florida; at the other end of the spectrum is Texas.

Mortgage rates have also been one of the biggest issues within the industry, and Berson says the rise in rates have had a small, but still negative, impact on affordability.

With subprime loans dominating the news recently, Berson explains that the ease of getting the loans contributed to the recent troubles that New Century Financial Corp. and Accredited Home Lenders Holding Co. are facing. There would have been 850,000 fewer home sales in 2006 if it weren't for subprime loans, Berson explains.

"We will see what happens in the subprime market and whether regulators eliminate the subprime market," he says.

Foreclosures and defaults, which are a byproduct of the subprime loan woes, he adds, are going to get worse before they get better. And once the federal government gets involved, there is a concern that there will be regulatory excess.

Berson also advised the seminar participants of the following points:

  • Economic activity is slightly below trend through 2007.
  • The Fed's tightening is likely done.
  • Housing activity is down again in 2007, but by less than in 2006.
  • Originations should fall in 2007.
  • Long-term rates should be little changed.
  • Regional home price weakness could cause a national price decline.

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