Volume 47, Issue 9 - November/December 2008


Homebuilding Hope on the Horizon
Forecasters Agree Housing Market Will Turn Around
by Penny Stacey and Tara Taffera

The annual Outlook Executive Conference: ‘09 Industry Forecasts and Trends included a range of speakers and forecasters with outlooks on the current economy and predictions for the 2009 housing market. While many of the reports appeared bleak, almost all of the speakers agreed that while the market is down now, it is cyclical and will come back. But, the big question on the minds of most in attendance was “when?”

The forecast, organized by McGraw Hill Construction, was held at the Capitol Hilton in Washington, D.C., October 22-23.

“The question we’re trying to answer and you’re trying to answer is, ‘when will housing prices hit bottom?’” said Kermit Baker, chief economist for the American Institute of Architects (AIA).However, he noted that after a recession (he called this one the worst in 50 years) the housing market typically does make a fast recovery.

“This recovery is likely to be different than past cycles, but the housing industry historically has recovered quickly,” he said.

He predicted that once the recovery occurs, housing will actually hit a bigger boom than it did in recent years, and that more homebuilding will actually occur in the coming decade than in the current one.

The Immigration Trend
He attributed this to immigration.

“We’re currently rivaling the immigration rates we saw in the early 20th century,” Baker said. “As the number of immigrants continues to grow, we’re seeing them disperse more throughout the United States.”

Because many immigrants are in the 20-30 age range and often are starting families or have small children, Baker said, “they’re very active in the housing market.”A

s for remodeling, he noted that it actually held strong for awhile, and even grew in recent years.

“Remodeling is approaching the size of the new construction industry,” he said. “The pace of growth has hardly slowed at all during this period.”

However, the down new construction market has led to less remodeling, he says, as with the tightened credit market, there are fewer homeowners, leading to fewer consumers looking to remodel. He also noted that many remodel or make home improvements right after purchasing a home, and since so few are able to purchase homes currently with the strained financing market, this has also led to a recent decrease.

“Third-quarter figures point to continued weakness in this market, though we haven’t hit bottom,” he said. Baker does expect the rate of the decline to stabilize in 2009 and 2010, though.

Green to the Rescue
He pointed to the green market as a plus for this sector.

“There is very clear evidence that homeowners are not only buying energy-efficient homes but also are remodeling to make [their homes] more energy efficient,” Baker said.

Baker ended his presentation on a semi-positive note.

“Let me remind you, we are in a cycle and cycles correct themselves-just wait,” he said.

Robert Murray, vice president of economic affairs for McGraw Hill Construction, spoke next, and he agreed that while the market appears unfavorable now, the steps the federal government has taken and other measures will lead to a turnaround—eventually.

“The basic assumption is this—that the extra steps taken to deal with frozen credit markets will be successful over time,” Murray said. “It’s going to take time for the U.S. economy to regain a firmer footing, though.”

Murray attempted to answer the burning question as to when the markets will hit bottom, and he predicts this will occur during the first or second quarter of 2009.

“Home prices are continuing to drop about 20 percent nationally,” Murray said. “They’ll probably drop another 10 percent in 2009 and then level out.”

However, he noted, that this year’s forecast has been one of the most difficult, noting that he and his staff revised the forecast several times based on recent events.

“This was a tough forecast,” he said. “This is a cyclical business … There are still pluses.”

The Downfall
Murray quoted investor Warren Buffett in referring to what led to the downfall, the three “Is”: innovators, imitators and idiots. In closing, he again brought up these words in looking to a brighter future.

“I think by the time you get to 2010, it will be time for the innovators and imitators, and hopefully the idiots will stay on the sidelines,” Murray said.

Norbert Young, president of McGraw Hill Construction, ended the host of presentations with a list of what he sees as four positive indicators for the economy:
• The powerful influence of green; 
• The growth in virtual design and construction; 
• The power of immigration; and 
• The fact that a new president will be elected.  

“Risky” is How NAHB Sums up the Housing Market

The National Association of Homebuilders (NAHB) hosted its Construction Forecast Conference on October 22, and it’s not a surprise, that the news was dismal.

“Things are a lot worse than any of us had anticipated six months ago,” said NAHB chief economist David Seiders in his opening economic forecast. “Who would have anticipated the turmoil in the financial markets that we’ve seen since September?”

He pointed out that the housing numbers continue to spiral downward and new home sales are still declining.

“I would say that the keyword for the day is risk,” he said. “The uncertainties out there are probably unprecedented and the degree of risk forecasted has probably never been higher.”

Before presenting his forecast he said it’s as much about risk as it is about forecasting. 

“I’ve got the single-family starts hitting bottom early next year but then embarking on a gradual recovery process,” he said. “One of the things that is going to be plaguing the upswing is the tightening of the credit market.”

Regarding manufactured homes that forecast is dismal as well. 

“I don’t really see any potential for growth in this market … but basically essentially dead in the water at less than 100,000 units per year,” he said. 

The same is true for the remodeling market as Seiders said, “It is unquestionably weakening.”

“The pattern we’ve got for 2009 and 2010 is somewhat reminiscent of what we saw in the late 80s and early 90s recessions,” he added.

Additional Views/Forecasts 

While many economists argue whether or not the United States is in a recession, the next presenter Maury Harris, UBS U.S. chief economist, said “At UBS we started to say ‘we’re in a recession’ back in January.”

He also pointed out that it’s obviously a poor environment for housing starts then gave his take.

“This year we have the starts at 940,000, next year at 780,000,” he said. 

Although he talked about other frightening facts such as rising unemployment rates, he did leave attendees with some good news. 

“One last thought is that, yes, the economics professions missed the severity of this crisis, but I’d like to remind people that just because we don’t know everything doesn’t mean we don’t know anything. We have the world’s experts on recession running the fed right now … I’m still sticking to that we’re going to find some solutions.”

When Michael J. Moran of Daiwa Securities America Inc. gave his housing forecast he said his forecast is already proving to be too optimistic.

“It’s proving to be too optimistic already on housing starts,” he said, then added, “This forecast does not involve a deep downturn.”

Bernard Markstein, NAHB staff vice president, also spoke about the R word as did some of the previous speakers. 

“I think we’re all on the same page—when we’re through this it will be an official recession,” he said. “Yes, we’re in a desperate situation … At least we know when we land the economy will survive, but unfortunately not every enterprise will survive.”

He added that some of the measures taken by the government were a step in the right direction. 

“We’ve seen that the policymakers, particularly the Fed, have gotten together and done a lot of the right things, which will take time,” he said. “At some point, new home sales will get better …. We need to remember that it will get better.”

Seiders also echoed the sentiments of a national recession, but also spoke of a better time to come as we have all learned lessons from this crisis. “I think we have learned something here and it’s very significant,” said Seiders. 

“I think this is so jarring that we’ll make some major changes. We’ll make mistakes, but I do think we’ll have a better system at the end of the day.”

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