October 4, 2006
Vol 1 | Num 5

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Economy Can Handle Housing Downswing, Analysts Say

The downturn in housing is not nearly as bleak as the financial press makes it out to be and the U.S. economy is in good shape to handle the sluggish sector, according to a group of economists who offered their mostly positive outlook during a teleconference hosted by the National Association of Home Builders. Housing starts are certainly down, notes David Seiders, chief economist for NAHB, but he sees an “overall positive outcome from what is an inevitable, necessary housing adjustment.”

As the residential market comes off peak, record-breaking numbers of housing starts in 2004 and 2005, the adjustment itself is not cause for concern, says Michael Moran, analyst for Daiwa Securities America Inc. The key, he notes, is whether the adjustment is orderly or disorderly—and he views the current shift as orderly. “We’re below the levels we saw in 2004 and 2005 but I think it’s important to note that those were overheated rates that were unsustainable. We’re right in line with where we were in 2003, and at the time, that was a record year for housing.”

Moran believes the market became overextended during the past couple of years and is now correcting itself to a more reasonable path of growth. “If we had moved at a smooth pattern from 2000 to where we are now…we would still be singing the praises of housing,” he adds.

Even with total new housing starts currently in a downswing, economists are confident the U.S. will not suffer an economic recession as a result of the drop in the residential construction market. The reason for this opinion, according to Nariman Behravesh, chief economist for Global Insight Inc., is that areas such as capital spending and exports are growing. “A major source of weakness is housing but the good news for the U.S. economy is that there are other sectors doing reasonably well and will continue to do reasonably well,” he says.

Corporate cash flow is at record-high levels right now, which means businesses should continue to hire more employees and make capital investments for the future, he notes. Exports are another area of strength as the value of the U.S. dollar has stabilized. “Our exports will continue to grow,” he says.

Behravesh points out that this housing downturn has two characteristics that make it unique compared to downturns of the past. First, the current conditions were not triggered by substantial increases in mortgage rates. In fact, he notes, mortgage rates are still quite low compared to historical standards. Secondly, unlike the downturn in the early 1990s, this dip comes at a time with a strong banking industry to mitigate its effect. These factors will stave off a crash of the housing market or a significant rattling of the overall economy, he says. “In the overall picture of the U.S. economy, we do believe [we] will go through a soft landing.”

And while certain metropolitan markets in the Northeast, South and West are facing overvalued home prices of at least 30 to 35 percent, price tags in some areas of the South and Midwest are relatively stable. High home prices in certain areas will need sluggish growth for an extended period of time to get righted, he says. “Home prices have to rise less than the rate of inflation for a few years to get back into equilibrium.” Again, a longer term adjustment that will not result in a hard landing, he adds.

JPMorgan’s Jim Glassman agrees that the current business backdrop is favorable, which will allow a smooth housing adjustment to take place in the coming months and years. “We’ve got a pretty good safety net here as the housing market has to correct some markets that got overdone,” he says.

For more housing statistics and information, visit www.nahb.org.


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