Economists: Worst of Housing Slump Over; Future of Home Prices Debated
Another day, another report that the nationwide housing slump should be coming to an end in the near future.
This time, the Wall Street Journal Online has conducted a poll in which economists said - by a nearly 2-to-1 margin - that the average selling price of a house will fall next year.
After several years of double-digit appreciation, housing prices stopped soaring this year. The 49 economists responding to the WSJ.com forecasting survey expect home prices, measured by the government’s Office of Federal Housing Enterprise Oversight index, to rise 2.8% this year and to fall by 0.5% next year.
That contrasts with a 13.4% increase in 2005.
“We’re nearing the end of the slowdown for most markets,” said Ethan S. Harris at Lehman Brothers.
Prices still have some ways to fall before they’ll stabilize, but there are signs that most drastic parts of the downturn – marked by a sharp pullback in demand for mortgage loans and new construction – have run their course.
Varying housing market views
The economists’ predictions for home prices next year vary widely, from an increase of 7%, predicted by Kurt Karl and Arun Raha of Swiss Re, to a 10% decline, expected by Maury Harris of UBS.
Mr. Harris, for his part, said he expects a large inventory of vacant newly constructed homes to push prices lower in the first half. Construction companies “built much more than were justified because of investor interest,” he said.
While 20 economists predicted home prices would rise next year, 24 forecast a decline. Just eight of the economists forecast gains greater than 2.1%, which is their average forecast for consumer-price inflation through mid-2007.
Richard DeKaser, an economist at National City Corp., a major mortgage provider, said he thinks the worst is over. “We’re starting to see inventories topping out and possible declining,” he said. Mr. DeKaser forecast a 4.4% increase in prices this year and a 1.8% decline next.
The housing market, of course, doesn’t move uniformly across the country; some regions or individual cities often have price changes decidedly above or below the national average.
Mr. Harris of Lehman expects price declines next year to be confined to “bubble” markets, such as those in Florida and California; moreover, those searching for an Arizona mortgage in various cities in that state may be witnessing artificially inflated prices.
“There’s no reason for prices to be falling in areas without a bubble,” he said. “People are just slowing down purchase decisions.”
Housing’s affect on the economy
Allen Sinai, at Decision Economics Inc., believes the worst of the bust is over, but he feels housing remains a big risk to the economy. The housing sector subtracted 1.1 percentage points from third-quarter gross domestic product, according to preliminary numbers from the U.S. Commerce Department.
The economists trimmed their forecasts for fourth-quarter economic growth: Their average estimate puts gross domestic product growth at a 2.3% rate in the fourth quarter, down from the 2.5% rate they forecast in the October survey. They expect growth to remain at that rate through the first half of 2007 and then to accelerate later in the year.
The housing slowdown is expected to hit consumer spending, but the “consumer won’t cave in and drive us into a recession,” said Mr. Sinai. Steady interest rates, controlled inflation, stabilizing energy prices and a solid jobs market will support the economy, he said.