Experts project recovery after hitting first-half ‘trough’

NEW YORK — The national housing market may not have reached bottom yet, but the second half of the year will likely begin the recovery from a slight downturn that followed a prolonged boom in sales and home prices, economists generally agreed during a panel this week at the Real Estate Connect NYC conference.

"We’re going to hit the trough in the first half of 2007," said Frank Nothaft, chief economist for Freddie Mac and a panelist for the "Housing Outlook: 2007" session. Other panelists included representatives from the California Association of Realtors, Rutgers University and the University of Pennsylvania.

Single-family construction, which peaked in third-quarter 2005, was 18 percent lower in third-quarter 2006, he noted. From that level Nothaft said he expects an additional decline of about 8 percent to 10 percent before the market turns around. "We’re most of the way through the correction but we’re not at the trough part yet."

Affordability plummeted from late 2005 through 2006, he also noted. "We saw really an affordability crisis in high-cost markets across the country." This has been lessened, though, as mortgage rates came down from about July to December, and prices have "stabilized or dropped" in the high-cost markets, he said.

Every forecast comes with a caveat, though, and Nothaft said that the ample liquidity in the mortgage market, while alleviating the affordability pinch, has led some borrowers to take on more risk than perhaps they should have in financing their homes. "Unfortunately (some loan products) are not right for every single consumer or every single borrower out there," he said, and there has been a large growth in the more-volatile subprime lending market.

"We’ve started to see some pickup in subprime default rates recently and I think that will continue in 2007," he said, as default rates for subprime lending tend to be eight to 10 times higher than with prime lending.

James W. Hughes, dean for the Edward J. Bloustein School of Planning and Public Policy at Rutgers University, said job growth should remain below average for the first half of this year. Employment growth did rebound somewhat in fourth-quarter 2006 to a level that was on par with the rate in fourth-quarter 2005, he also said. "In terms of job growth that’s going to continue to support the housing market through 2007 unless there is some shock to the economy," he said.

The United States’ position in the global economic sense is a long-term worry, Hughes also said. "The rest of the world has been lending us $1 billion a day in order to support our consumption habit — that can’t go on forever," he said. "At some point they’re not going to lend to us if we become a risky investment. Whether we can continue to have the kind of account deficits we have is problematical."

The potential for an increase in global outsourcing also poses an economic threat for the country, Hughes said. "Could our knowledge-based industries succumb to the same trends that happened in manufacturing? We’re going to face intense competition from Eastern Europe and India based on cost factors. We have to invest in our educational infrastructure in this country if we’re going to remain on top."

In the California real estate market, existing-home sales fell about 23 percent to 24 percent in 2006 compared to the prior year, and that is expected to be followed by another 7 percent decline this year, said Leslie Appleton-Young, chief economist for the California Association of Realtors.

Overbuilding has left a large inventory of properties on the market in some areas, she said — there is about a 10-month supply of properties for sale in one region of the state, she said, though she expects excess inventory to be absorbed within about a year.

2005 and 2004 were peak years in the state’s real estate cycle, she said, and some buyers who relied on unconventional loans to buy their properties are now stretched beyond their means as mortgage payments adjust higher. "We are going to see a little bit of an upsurge in inventory when people can’t make those payments." Other homeowners, who do not need to sell, will "stay put for awhile," she said, noting that home prices have "plateaued" or are dropping "a little bit" in many areas of the state.

Susan Wachter, professor of real estate and finance at University of Pennsylvania and co-director for the Institute for Urban Research at the university’s Wharton School, said that withdrawals of mortgage equity have been a driver for the economy, though this engine is cranking down. "We’re tapped out," she said. While this level of withdrawals is not likely to grow, it’s uncertain how much it will decline, she said.

Wachter expressed cautious optimism about the housing market in the second half of this year. "2007 is in the bag for the first half … we’re near the bottom construction. We’re frankly not at the bottom. I think the second half of 2007 is more in question." She said she expects housing stats for this year to resemble those in 2006.

"If there is a downside risk, the risk is not of a slowing economy — the risk is of inflation." And if interest rates rise significantly as a result, there is a threat of growing mortgage default rates and even recession, Wachter said.

Her outlook is generally positive, though. "People still have to live somewhere," she said. "I think we’re going to be surprised about how prices actually hold up in this market."

Nothaft said he expects that 30-year fixed interest rates will be "inching up just a tiny bit" this year, for an annual average of 6.3 percent, with relatively flat rates for adjustable-rate mortgages. The federal funds rate, he said, is expected to stay put for awhile.