Six years ago, when the market was flying down the road in overdrive, economist Mark Zandi drew the ire of homebuilders when he predicted housing was about to drive off a cliff. Now, Zandi's singing a different tune. And the builders love it.
"I'm optimistic and I'm confident that everything seems to be falling into place for a better economy and a better housing market," the 51-year-old chief economist at Moody's Analytics proclaimed at the National Association of Home Builders' annual spring construction forecast conference.
The rub? The bust won't end until this time next year, Zandi offered. But if housing interests can hold out until then, he added, construction "will ramp up in earnest."
Zandi's forecast squares with the NAHB's. "Momentum will begin to build as we get into 2012," chief economist David Crowe predicted. "And by the end of the year. We should be back to where we were at the beginning of 2007."
Crowe isn't looking for any increase in single-family housing starts this year, none at all. But he sees a 51% jump next year, from 471,000 to 698,000. That's a far cry from the 1.26 million houses builders averaged every year between 1995 and 2003. But most builders will be happy to wake up from their coma, even if they have to remain in sleep-mode for another 12 months or so.
Apartment builders will put up 140,000 units this year, according to NAHB estimates. That's up 23% from 114,000 last year. And Crowe is predicting a bigger jump this year, to 175,000. That would be back to the same level as builders were producing in late 2009. But during the 1995-2003 period, they were building more than twice that many.
The NAHB economist is expecting a "nice uptick" in both new and existing home sales. "But it will be a slow one," he added.
Zandi, meanwhile, told the meeting, which has been turned into a two-hour webinar, that the market is poised to "pop," ending a six-year-long nosedive that will see values drop 35%, peak-to-trough.
The housing market still has another year of relatively rough sledding because the market is "awash in excess inventories," the Moody's economist explained.
Warning that the foreclosure crisis is far from over, he said the "bulk" of loans that are delinquent more than 90 days are likely to end up as distress sales. "Some will get modified, but most won't," he predicted. "So distress sales, now a quarter of all sales, should rise to 33%-35% by the end of the year."
He said the gap between the current level of vacant homes for sale, for rent or being held off the market and the "actual number you'd expect to see in a well-functioning housing market" is roughly 1 million units. For the most part, though, the excess is "very highly concentrated" in Arizona, California's Central Valley, Florida and parts of the Midwest.
"There's more work to do" with regard to the excess inventory, the economist said. "But we're making progress. It will remain uncomfortable for the next 12 to 18 months. But once we reach the other side of the bulge, thing's are looking really good."
While noting that "it is difficult (for would-be buyers) to get enthusiastic about anything when house prices are falling," Zandi also said most houses are now priced correctly. "House prices have fallen sufficiently on a price-to-income and price-to-effective rent basis so the market is appropriately priced," he told the webinar.
That's not to say there won't be further price declines in some places, he added. But in those instances, sellers will be "overshooting," he said, which is why investors are still in the market.
Zandi said the "really good news" in his forecast is that demand will increase faster than supply because the infrastructure for building is "pretty significantly impaired." And that's a point also made by Crowe.
That the current rate of housing starts is "dramatically off any kind of normality" is a direct result of the inability of builders to get funding to buy land, develop it and build homes, he said.
According to Crowe, starts should be running at about 1.5 million a year, based on current needs. But in actuality, they are at less than a third of that target. "Most states are underproducing," he said, adding that many have a deficit greater than a normal year's supply.
Noting that the inventory of new homes is only 2,000 units above the record low of 183,000 recorded in 1967—and only 78,000 of those are completed and ready to be occupied—the NAHB's chief economist said pent-up household demand is awaiting the recovery.
As many as 2 million unformed households—Crowe called them "shadow buyers"—are ready to move out of mom's basement, he said. "The underlying demographics call for more production."
Zandi said that while "there is no good data on household formations, which is the most important number on the planet," he is confident that there's "a lot of juice" ahead for the next decade, as builders work to make up for the deficit between the strong demand for houses and apartments and the lack of supply.
Crowe, meanwhile, noted that although prices appear to be weakening, they are not necessarily falling at all when distress sales are removed from the equation. The house price-to-income ratio, which reached an all-time high of 4.7 in late 2005, early 2006, is now at 3.3, which is "pretty much back to down" to the historical 3.2 level, he pointed out.
According to Robert Denk, assistant vice president for forecasting and analysis at the NAHB, while there are "a few places" where house prices are still too high relative to income, prices in many others have overcorrected.
Denk, who also took part in the webinar, noted that although prices in about a third of the country declined between last year's third and fourth quarters, the median rose in more than half the states.
And like the other two speakers, he pointed out that foreclosures are heavily concentrated in California, Florida, New York and Texas. Foreclosures "are a problem everywhere," he said, "but the ‘crisis’ is in only a handful of states."
