Those waiting for the home building industry to right itself and start down the primrose path are going to have to wait a while longer, the analysts at Fitch Ratings in New York, said Wednesday afternoon during Fitch's 2008 Annual Housing Conference.

"This downturn was not precipitated by a recession, but our economist thinks the U.S. is now in a modest recession, that will roughly extend through the June quarter," said Robert Curran, managing director, corporate finance, home builders and building materials companies for Fitch Ratings. "Issues of affordability, excess supply, and poor buyer psychology still dominate."

A modest recession, declining home prices, tighter mortgage standards—even for conventional loans, poor buyer psychology, and near-record levels of new and existing homes for-sale further boosted by foreclosures and people walking away from their homes defines the current environment for housing, Curran said, noting that the housing contraction will last through 2008, at least.

"If mortgage rates should rise, or credit terms tighten further, then our housing forecast could turn even more pessimistic," Curran said. "And if the economy, perhaps now in a modest downturn, slides into a sharp recession, then the downturn would not only deepen, but extend further into 2009."

Fitch forecasts new-home sales to fall 15 percent further in 2008 to a level of 658,000. Fitch analysts also project total housing starts to fall 22 percent to 1.06 million, and single-family new-home starts to drop 25 percent during 2008.

Comparing the current housing downturn to the one that peaked in 1986, and reached its trough in 1991, Curran said total housing starts fell 44 percent during that time, with single-family starts decreasing 28.7 percent. While Curran said the numbers were "reasonably similar," the current housing recession has already seen starts fall from a seasonally adjusted (to an annualized rate) peak of 2.27 million in January 2006, and as of April's release from the U.S. Cenus Bureau, it sat at 1.03 million, a decrease of 54.6 percent.

In the first quarter of 2008, average home builder revenues declined 22 percent, and new orders fell 38.5 percent. The good news is Curran sees a bottom in new-home sales approaching.

"Late this year, new-home sales are likely to bottom on a seasonally adjusted basis and flatten out on a year-over-year basis, with housing starts troughing three to six months later," Curran said. "Home builder revenues are projected to fall about 30 percent in 2008, while profits drop 50 percent for those builders that do make profits."

CAUSE FOR CONCERN

The single most pressing problem for housing today is excess supply, Curran and other Fitch analysts said. New-home units for-sale, on a month's supply basis, reached 11 months in March (seasonally adjusted) well above the five and a half to six months' supply that Fitch believes represents a rough equilibrium of supply and demand. In the existing market, there is a 9.9 months' supply, Curran said.

The Census' numbers understate the problem, Curran and other analysts said.

"There has been an increase in the shadow supply of vacant for-rent single-family homes and reversion of condominiums to the rental pool," said Steven Marks, managing director, Fitch's REIT Group. "On the demand side, the single-family housing slowdown turned many good renters into poor homeowners, many of whom have become renters again."

The near-record level in single-family rental vacancy rates reflects the difficulties being encountered by investors who are waiting to put their single-family homes back on the market, but are struggling to find renters for them.

Curran said it is difficult to forecast the number of single-faily rental units that will become for-sale units, or when their owners will try to sell them.

"But they will have an impact on the market," Curran said.

For now, Fitch's analysts see more former homeowners becoming renters, said Adam Fox, senior director of Fitch's Commercial Mortgage Backed Securities Group.

"Displaced homeowners are going to return to the rental market, while economic weakness and lack of attractive financing options are going to deter first-time home buyers," Fox said.

Legislation being pushed by Congress to try and stem the wave of foreclosures, to keep people in their homes, is unlikely to be a big help, Curran said

"Net-net, I don't see the government as a savior here for housing, it may make the situation a little less onerous for housing," he said.