Real Estate

Home builders: Worst is yet to come

Economists offer dour outlook for housing prices and construction, citing continuing credit crisis - weakness is likely to persist into 2009.

By Chris Isidore, senior writer

NEW YORK ( -- The battered markets for real estate and home building still have farther to fall, according to a range of economists who spoke Wednesday at a forecast conference sponsored by the National Association of Home Builders.

The economists agreed that the problems with home finance markets will continue to hit housing into next year, and that even when there is a recovery, it will be a slow process that will see weakness continue into 2009.

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While most said they believed the overall U.S. economy can weather the housing downturn, several saw significant risk of a recession. Mark Zandi, chief economist of Moody's, said that large areas of the country will fall into recession, if they haven't done so already.

The economists also admitted to being surprised by how bad the housing downturn has become, and all said that making forecasts of a recovery is difficult due to the problems in the credit markets.

"This time, we just don't know how it's going to pan out because the securities markets have become so much more important," said David Seiders, chief economist with the builder's trade group.

The conference was held in Washington, D.C., on Wednesday, as another trade group, the National Association of Realtors, was reporting the lowest pace of existing home sales since it started using current measures to track those sales since 1999. The sales of existing home sales slowed to the slowest pace since 1998, while the supply of homes on the market rose to its highest level in 12 years.

Zandi estimated that the excess inventory of homes on the market is close to one million, and he added that the glut could get worse if mortgage defaults and foreclosures increase, as it now appears they will.

"We're awash in inventory," he said. "I don't think this [credit] crisis is over. It's less stark than it was four to eight weeks ago. But I wouldn't be surprised if the embers which are smolder catch on fire again."

Thomas Lawler, a former Fannie Mae official who is now a private housing and finance consultant, said the easy financing terms of the boom years have been replaced by an overly restrictive lending environment. But even when underwriting standards return to more normal conditions, it won't be enough to lift demand and prices back to peak levels, he added.

"There's a part of the mortgage market that is gone for at least a while, and it should be because it should never have been there," Lawler said. "But that will slash demand. If the pace of building doesn't continue to fall, we'll see even worse price declines." He's now projecting prices down another 6 or 7 percent next year, on top of declines of that amount this year.

"The fact that building wasn't cut as early as it should have been is one of the reasons that that prices continue to fall," he said.

Still, Michael Moran of Daiwa Securities said he puts the chance of a recession at only about 30 percent, as employment and income should stop the housing market from going into a free fall.

"I think it's a blow the economy should be able to absorb," he said. "The housing prices are holding up reasonably well. If you look at the traditional determinants of housing demand, they're not that bad."

And Bernard Markstein, a National Association of Home Builders economist, said that the fact that home building isn't seen as coming back to 2005 levels or even 2006 levels for the foreseeable future isn't a bad thing.

"The real comparison should be to 2002 to 2003, back when we were meeting our needs, not to 2004 or 2005," Markstein said. "That's when we were overbuilding - we don't want to be there." Top of page