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| Continuing Downward Revisions in Forecasts |
| Written by Jonathan Smoke | |
| 08.16.2007 | |
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Discuss this article on the forums. (0 posts) Last week the National Association of Realtors (NAR) revised their forecasts for existing home sales in 2007 and 2008 to 6 million and 6.4 million respectively. NAR also lowered the forecast for new home sales for 2007 and 2008 to 852,000 and 848,000 respectively.  This week, the National Association of Home Builders (NAHB) released its revised forecasts, in which they also continued the trend of reducing projections for home sales. Their view of existing home sales isn’t as rosy as NAR. NAHB is forecasting 5.1 million sales this year and 5.05 million in 2008. It isn’t until 2009 when existing home sales pick back up to 5.45 million.The NAHB now forecasts this year’s new home sales to be 850,000, in line with NAR’s forecast. But in 2008, the NAHB is more optimistic, expecting new home sales to pick up slightly to 894,000. And the NAHB is expecting a return to over a million new home sales a year in 2009. In the August 15th edition of the NAHB’s “Eye on the Economy,” David Seiders, NAHB Chief Economist, provides this commentary on the forecasts: “NAHB’s forecasts for home sales, housing starts and Residential Fixed Investment have been revised downward (again) for 2007-2008, and we’ve run the short-term forecast through 2009. We’re now expecting home sales to trail downward through all of 2007 and we don’t expect systematic improvements to housing starts and RFI until the second half of 2008. We’re looking for solid increases in 2009, however, and the housing market will have good growth potential further down the line.”
What’s the source of the 2009 optimism? A clue is in statements about the expectation of ownership levels rising again. Here’s what Seiders had to say about that topic: “Second-quarter data on housing vacancies show that the supply overhang remains quite heavy in both the for-sale and for-rent components of the market. The overhang is particularly heavy in the for-sale market, reflecting large increases in both single-family and multifamily (condo) markets since mid-2005. This overbuilt condition is a legacy of outsized purchases by investors/speculators during the boom period and subsequent unloading of units onto the market as house price prospects have deteriorated.
The U.S. homeownership rate has been eroding for three years and the rentership rate has shown equivalent gains. Persistent affordability problems facing prospective home buyers, combined with relatively friendly conditions in the rental market, will put further downward pressure on the homeownership rate – and a rising wave of mortgage foreclosures will contribute to the own-to-rent dynamic. The homeownership rate is sure to rebound on a longer-term basis, however, and new records will be achieved down the line.” Where is the data to support the claim that homeownership “is sure to rebound… and new records will be achieved down the line”? If the credit market has learned its lesson about extending cheap credit on the basis that home prices will always rise to rescue buyers truly in over their heads, the industry will be lucky to keep the ownership rate where it is now. It is far more likely to fall at least to its 20-year average, which implies more negative demand on sales and more inventory overhang (see “Declining Ownership Equates to Declining Demand”). And without Fannie Mae and Freddie Mac’s charters being expanded to cover much more expensive homes, the peak of the ownership rate at 69.2% in 2004 is not likely to be reached again in the foreseeable future. So likewise the peak in new home sales reached in 2005 will be a distant memory for some time to come. That isn’t to say that we won’t have 800,000+ in new home sales over the next several years assuming the economy doesn’t fall apart, but dreaming of new records to be achieved is not a bet I would be making based on our intelligence. 
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