A Soft Landing or a Crash
For the Housing Market?

Everybody agrees that the housing market is drifting down from record highs. But is it coming in for a soft landing, or is it about to crash?

That's what economists debated at the National Association of Home Builders' spring construction forecast conference, held on Thursday in Washington, D.C. Attended by building-product manufacturers, builders and others involved in the housing industry, the semiannual event covered the likely trajectory of housing prices, starts and sales over the next year or two.

Although most of the economists on the panels have close ties to the industry, none was projecting a continuation of the five-year housing boom, which peaked last July. Nearly all described the housing market as "in transition," although they couldn't agree on how much favorable factors like strong overall job growth, low unemployment and moderate inflation will be able to mitigate the drag of rising mortgage interest rates, lack of housing affordability and wage stagnation.

Even the most optimistic panelists were guarded in their expectations for the coming two years. NAHB Chief Economist Dave Seiders predicted the rate of home-price appreciation would slow to 4% by the end of 2006, only a third of last year's pace. In the first quarter of 2007, he expects new and existing single-family home sales to fall 5.8% to a total of 6.59 million units and single-family starts to drop 13.4% to 1.15 million units. "It will be a general cooling process, not a thud," he says.

Similarly, Michael Moran, chief economist of Daiwa Securities America, Inc., pointed out that while there's "little sign of stress" in discretionary spending, and most people are able to keep up with their loan payments and other expenses, personal savings rates fell into negative territory last year. "This can't continue for the long term," he says.

Mark Zandi, chief economist of Moody's Economy.com, pointed out that home prices have soared so high in many parts of the country that they're out of reach for many buyers. "Affordability has collapsed to where it was in the ‘90s, despite very aggressive lending," he says. The rapid rise in interest rates over the past few months have become a barrier for many first-time buyers, he says, and are prompting many short-term home flippers to sell their holdings. That could lead to localized crashes, which he defines as a peak-to-trough price decline greater than 10%, in markets like Washington, D.C., the Jersey Shore, Miami, Las Vegas and Orlando, Fla.

Housing consultant Thomas Lawler, former senior vice president for risk policy at Fannie Mae, notes that flattened or declining home prices are already apparent in places like Northern Virginia, Maine and Massachusetts. "They turned more quickly than anyone thought." He adds that preliminary data suggests that aggregate home prices were flat in the first quarter of this year compared to the previous quarter -- the slowest growth rate since mid-1996. Even so, he says, housing remains regional and prices aren't falling everywhere -- indeed, they're rising in Texas, Tennessee, Oklahoma and the western portions of North and South Carolina, partly due to local job growth and demand for housing from hurricane refugees.

While local economies have always been the prime movers of housing markets, increasingly, global factors are coming into play, the panelists said. Outsourcing has eliminated more than 3 million American jobs in manufacturing, depressing housing in the Rust Belt, while mortgage rates are dependent on foreigners' willingness to buy U.S. debt.  And, rising energy prices abroad slash consumers' buying power here. These days, the economists said, it's important to frame local and national housing trends in the broadest possible context. "World economies are more in synchronization than ever before," says James Glassman, managing director of J.P.Morgan Chase & Company.

-- June Fletcher is a staff reporter at The Wall Street Journal and the author of "House Poor" (Harper Collins, 2005). Her "House Talk" column appears most Fridays on RealEstateJournal.com. Email your questions about the residential real-estate market. Please include your name, city and state. If you don't want your name used in our column, please indicate that. Due to volume of mail received, we regret that we cannot answer every question.

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