2008 United States Housing Market Outlook

Saturday, January 5, 2008

Kae Davis (Coldwell Banker Residential Brokerage): Real Estate Agent in Ashburn, Loudoun County, Virginia  

This article was published on: 01/01/2008 by Realtor.org and can be found at http://www.realtor.org/rmomag.NSF/pages/feature3jan08?OpenDocument


A Normal Market: Outlook Shows Steadying Picture


After trudging through the real estate slowdown in 2007, you can expect to see a light at the end of the tunnel this year — whether you’ll actually reach that light before 2009, however, economists aren’t sure.

Housing forecasters agree that new- and existing-home sales and prices will bottom out this year, either in the second or third quarter, because of the underlying health of the U.S. economy.

The NATIONAL ASSOCIATION OF REALTORS® is forecasting existing-home sales and prices to stabilize in the second quarter and rise throughout the second half of the year, reaching 5.7 million sales by the end of 2008, equalling the forecast for 2007. The median national price for existing homes is expected to level off, ending a 1.7 percent decline in 2007.

In the new-home sector, which faces an ongoing inventory glut, sales will drop to 693,000 from 796,000 last year, NAR says.

Although U.S. economic growth this year isn’t expected to be spectacular — about 2.8 percent of gross domestic product for the year — job, wage, and wealth gains from a rising stock market will be sufficient to give consumers the wherewithal to start buying again. Since the housing slowdown began in the second half of 2005, the economy has added some 4 million net new jobs, wages have grown by 8 percent, and household wealth has grown by $5 trillion, mainly thanks to stock gains, an NAR analysis shows.

“This slowdown has never been about the underlying fundamentals of the economy,” says NAR Chief Economist Lawrence Yun. “Consumers have the means to buy, but they’ve lacked the confidence. Once they see sales and prices stabilizing, they’ll be back in the market.”

The availability of financing will help them.

Credit markets experienced a scare in the third quarter of last year when concerns about subprime mortgage defaults and writeoffs associated with securities backed by such loans roiled investors. But this year, there will be ample financing available for most borrowers with sound credit. That holds true for borrowers of both conventional and jumbo loans, although jumbo loans could remain a bit on the costly side as lenders wrestle with lingering skittishness among investors about the safety of nonconforming mortgages.

Where economists’ outlooks differ is on how fast home sale growth will resume once the bottom’s reached.

In a conservative estimate, the Mortgage Bankers Association predicts existing-home sales will actually be down 10 percent to about 5.2 million units in 2008 and won’t rise above 2007 levels until 2009. The reason: Tighter underwriting standards will shrink the pool of qualified borrowers, stretching out the amount of time it’ll take to absorb housing inventory.

With access to loosely written credit closed off, “you’re likely to see continuing decline in house prices and buyers sitting on the sidelines,” says Douglas Duncan, the MBA’s chief economist.

Tighter underwriting is exactly what the market needs right now, economists say, because it brings the cost of financing back into alignment with risk, helping to restore confidence in housing after the subprime excesses. But Yun thinks the pool of buyers, while shrunken, will be larger than some analysts believe because buyers will have other financing avenues such as federally backed loans.

“The FHA had a 20 percent share of the market in 2000 [before the growth of subprime lenders],” Yun says. “So it can capture that share again and grow more if Congress passes reforms, which it is close to doing.”

Still, not all markets will fare equally well once sales start picking up again nationally.

In parts of the country like southern Florida, some regions of California, and popular Sun Belt cities like Phoenix and Las Vegas that saw the biggest run-up in prices and speculative building, excess inventory will keep prices down, making housing less attractive for move-up and second-home buyers. “With these buyers out of the market, we’ll see a slow work-down of inventories,” says Bernard Markstein, vice president of forecasting and analysis for the National Association of Home Builders.

California, in particular, faces a daunting shake-out period. That’s because so many borrowers there, facing high housing costs, turned to risky subprime loans during the boom and now are in trouble as rates reset to levels they can’t afford.

“We haven’t seen the bottom on foreclosures yet,” says Leslie Appleton-Young, chief economist of the CALIFORNIA ASSOCIATION OF REALTORS®. “We won’t see the worst of that until the first part of this year.”

Even so, parts of the state with a high concentration of well-heeled households, like the San Francisco Bay Area, will fare well, picking up steam in the second half. Most housing problems in the state will be concentrated in lower-cost areas such as Stockton, where builders snapped up large tracts of cheap land, fueling a run-up in speculative projects. “There was a lot of new construction in these areas, with a lot of people getting swept up in the prospect of double-digit price appreciation,” says Appleton-Young.

Other areas of the country face hurdles but for a very different reason: economic weakness. Detroit and other parts of Michigan that are feeling the brunt of the country’s ailing auto industry are the poster children for areas where a weak economy will keep home sales and prices in the doldrums throughout the year.

“There are places where people will still be hurting,” says Markstein.

Nationally, though, prospects are brightening.

Many parts of the country are doing well economically and buyers in these regions are still in the market in a significant way. These include areas with strong transportation hubs, like the Riverside and San Bernardino region in California, where so many of the country’s Asian imports are processed for distribution, and high-tech hotbeds like Seattle, the San Francisco Bay Area, parts of Texas, and the research triangle in North Carolina. There’s even new-home building still going on in some of these areas, as unlikely as that might seem given all the talk about inventory gluts in so many markets. “Even today you can build if you have the right conditions in place,” explains Markstein.

Whatever optimism economists have about housing in 2008 could quickly fade away, if the economy sinks into recession. But chances of that happening are relatively low—former Federal Reserve Chairman Alan Greenspan in speeches late last year gave it a less than one-in-three chance. Those odds will improve even further when housing stops acting as a drag on the economy, economists say.

That’s something even the Mortgage Bankers Association sees happening this year. Although it doesn’t forecast a big pick-up in home sales until 2009, it expects the economy to grow slowly through the first three quarters of the year and then start accelerating as home buying starts ramping up toward the end of the year and into 2009.

“That’s typically how the pendulum swings,” says Duncan. “Buyers sit on the sidelines until they think they’ve seen the bottom, and sometimes they wait a little longer than what the longer-term trend line would be, but eventually they get back in.”

Commercial Stays Sharp

Although the glory days of 2005, when institutional buyers were snapping up properties to take advantage of heady price gains and advantageous capitalization rates, are over, commercial real estate is poised for continued solid performance across sectors this year.

The economy is still growing, consumers are still spending, and businesses are still investing — all positives for commercial properties. But none of the trends are as robust as the past two years, says Yun.

Housing’s dampening effect on the overall economy is impacting commercial property price appreciation and creating a slightly less favorable commercial credit climate.

“Commercial real estate is part of the global capital markets today, so investors have been feeling the effects of more conservative lending practices in the last year,” says Robert Bach, senior vice president and national director of market analysis for commercial brokerage giant Grubb & Ellis in Chicago. “Financing is still available, and at attractive rates, but not at the historically cheap rates seen before, so real estate is returning to what it’s traditionally been, an income investment.”

That means that investors today are expecting most of their returns to come from cash flow rather than appreciation, Bach says.

NAR is predicting transaction volume for the four commercial sectors it tracks — office, industrial, retail, and multifamily — to total $300 billion this year, down from $350 billion in 2007.

Leasing and rental rates across most sectors generally will be up, although not by much, and in some cases absorption will be relatively flat, the result of new development coming on line.

Office demand will remain strong and rental rates are expected to increase, but not at rates as high as in 2007. Absorption will weaken slightly, in part because jobs tied to housing, particularly on the lending side, are going away, reducing office demand, says Bach.

Industrial continues to do well, particularly in transportation hubs where sophisticated logistical facilities are needed to handle growing import volumes. “We’re just in the third inning of this growing logistics industry,” says Bach.

At the same time, technology companies are keeping up demand for flexible research space, helping tech hubs like Seattle, says Yun.

Retail, which had been strong in recent years, poses one of the biggest question marks, largely because consumer spending is showing signs of weakening as flat home prices make people feel less financially well off. Vacancies are expected to rise slightly.

Multifamily would seem to be the one sector in a position to benefit from the housing slump, as renters delay buying and new households turn to rentals. Indeed, NAR is forecasting occupancy and rental rates to rise.

But the gains won’t be spectacular because new supply is coming online from nontraditional sources. Some home sellers who aren’t attracting the prices they want are converting their houses to rentals, thus competing with apartment buildings. Newly constructed condos converting to rentals in the face of weak buyer demand also add to the supply.

Overall, 2008 will prove to be a solid year in which residential sales shore up after two years of decline and commercial deals remain healthy, even if they’re not as robust as they’ve been.

NAR’s 2008 Forecast
2006 2007* 2008**

Interest Rates

30-year fixed*** 6.4% 6.4% 6.5%
Home Sales  
Existing-home price increases 1.0% -1.7% 0.0%
Existing-home sales 6.5 million 5.7 million 5.7 million
New-home sales 1.1 million 796,000 693,000


Vacancy rate 5.9% 5.9% 5.6%
Rental rate change 4.1 2.9 3.8
Net absorption (units) 229,428 209,153 234,398

Office Space

Vacancy rate 12.5% 12.9% 12.4%
Rental rate change 5.2 6.1 3.1
Net absorption (square feet) 78.0 million 53.8 million 65.1 million

Industrial Space

Vacancy rate 9.4% 9.6% 9.4%
Rental rate change 1.4 3.9 3.7
Net absorption (square feet) 202.8 million 125.0 million 165.6 million


Vacancy rate 8.1% 9.3% 8.9%
Rental rate change 3.9 2.9 1.0
Net absorption (square feet) 10.7 million 12.1 million 19 million

Economic Indicators

Inflation rate 3.2% 2.8% 2.8%
Gross domestic product 2.9% 2.1% 2.8%
Unemployment rate 4.6% 4.6% 4.9%

* Estimated. ** Projected. *** Average for year
Source: NAR Research

The Economists

Top housing analysts see strength in the underlying economy.

Lawrence Yun
Chief economist, NAR

Robert Bach
Senior vice president and national director of market analysis, Grubb & Ellis

Leslie Appleton-Young
Chief economist, California Association of Realtors®

Bernard Markstein
Vice president of forecasting and analysis, National Association of Home Builders

Douglas Duncan
Chief economist, Mortgage Bankers Association


NAR Research
The latest economic news and data

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