For economists who have been forecasting a rebound in housing every six months for the past two years, the financial crisis — triggered by questionable lending practices — is a sobering experience.
``Things are a lot worse than anyone would have anticipated six months ago,'' said David Seiders, chief economist of the Washington-based National Association of Home Builders.
``Who could have predicted the financial turmoil of the last six weeks. The economy is weakening even more than any of us thought it would,'' Seiders said Oct. 22 at NAHB's fall construction forecast conference in Washington. ``The uncertainties out there are unprecedented and the risks have never been higher.''
The economy needs to be a top priority for the next president, Seiders noted as the nation headed to the polls to vote. But economists don't expect a pickup soon — in housing or the economy. The consensus is that housing starts will continue to drop throughout 2009, sales may pick up midyear and prices will fall probably through 2010, for a total drop in value since 2005 of 30-33 percent.
The continued housing downturn is troubling news for PVC makers, as pipe and fittings account for 40 percent of PVC consumption in the U.S., and window profiles and tubing another 17 percent, according to Chemical Market Associates Inc. in Houston.
If economists showed any optimism, it was that they unanimously agreed the government's bailout steps, along with the Oct. 29 lowering of the federal funds rate to 1 percent, are moving things in the right direction.
``The totality of what the policy makers have done will win the day,'' said Mark Zandi chief economist and co-founder of Moodys.com.
``They have acted in an unprecedented way. But the work is not done, and the economy will need another stimulus and another wave of mortgage writedowns.''
Still, the current trends are ``frightening,'' and the federal government's actions have unintentionally ``scared the hell out of everybody,'' said Ivy Zelman, chief executive officer of New York-based housing research firm Zelman & Associates.
The biggest problem is the huge number of property foreclosures, which have inflated housing supplies and lowered housing prices.
``Appraisers are appraising everything off foreclosure prices,'' Zelman said, ``so builders are forced to reduce prices to get people in the door. There will be more distressed sales, more spiraling down of home prices. It is an ugly circle. We are in a lot of trouble.''
The foreclosure numbers paint a somber picture. Although subprime loans account for just 12 percent of all mortgages, they represent more than 50 percent of foreclosures since 2006, said Frank Nothaft, Freddie Mac's chief economist, in McLean, Va. There are an estimated 1.4 million excess vacant units on the market. In some markets, like Phoenix, vacant units account for 79 percent of sales.
``The rate at which foreclosures are adding to supply are twice the previous post-World War II rate,'' said Doug Duncan, vice president and chief economist of Washington-based Fannie Mae.
According to Moody's Zandi, there are 12 million homeowners whose homes are valued for less than market value — a number he expects will grow to 15 million by October 2009. ``There are in excess of 1 million extra homes on the market that will take two years to work off,'' even with the low housing starts, Zandi said.
``The problem is that there is a huge excess supply, somewhere in the neighborhood of 10-11 months vs. the normal rate of five to seven months,'' Duncan added.
Housing starts — near 2 million in 2005 — dropped to 1.34 million in 2007 and are projected to drop to 940,000 in 2008, and 780,000 in 2009, said Maury Harris, Chief U.S. economist for UBS Investment Bank in New York. ``The financial crisis can't get much better until housing starts stabilize,'' he said.
But that is not likely to occur soon. Zandi predicted housing starts will hit a post-WW II low in the next three to six months — an outcome reflected in Commerce Department data showing the slowest pace of new single-family home construction since August 1982.
In addition, builder confidence has fallen to an all-time low. The NAHB/Wells Fargo Housing Market Index declined to 14 in October, its lowest level since the survey began in 1985. A number over 50 would indicate that more builders view sales conditions as good than poor. ``That is a dreadful decline,'' said Seiders. ``Builders are pessimistic.''
Exacerbating the situation is another factor most economists are not considering: ``the lack of liquidity being offered builders,'' Zelman said. ``We can't get funding for builders, even ones that are doing well.''
It is a credit crunch that extends beyond housing mortgages and builder financing and into all areas of lending, as evidenced by the number of delayed deals and deals that have been canceled because of an inability to obtain funding.
``Lenders are tightening credit for all types of loans, including mortgages,'' said Freddie Mac's Nothaft.
``The collateral damage of the government takeover of Freddie Mac and Fannie Mae is that it meant no one was safe,'' said Zandi — including money-market mutual funds that are a strong source of business financing and commercial paper.
It is the uncertainty that makes everyone wary, Fannie Mae's Duncan said. ``The fear across the marketplace is who is leveraged across what markets.''
Michael Moran, chief economist at Daiwa Securities America Inc. in New York, agreed.
``Some institutions need to be closed,'' Moran said. ``And because it is not clear which ones those will be, investors are leery of investing anywhere.''
He said the situation won't improve until the bailout plan begins to emerge and there is an idea of where the government is placing its dollars. ``At that point, the financial market will begin to see where the opportunities are and you will see more financial flow and interbank activity.''
But, for now, he said, ``the financial turmoil will have a big influence on both businesses and consumers. The financial crisis has had an influence on attitudes.''
The October consumer confidence index from the Conference Board, a New York-based business research group, underscored that. That index fell 23.4 points from September to October to an all-time low of 38, compared to a reference point of 100 in 1985. In addition, the number of consumers expecting business conditions to worsen surged to 36.6 percent, from 21 percent in September, and the percentage of consumers expecting fewer jobs in the months ahead jumped to 41.5 percent from 26.9 percent.
With job losses expected to average 150,000 over the next six months, compared with an average of 75,000 in the first eight months of 2008, economists remain uneasy.
``There is a lot of dismal news,'' Duncan said. ``The equity value of homes has been falling and hit consumers hard. The extraction of home equity has declined. Consumer credit delinquency is rising, consumer credit demand has plummeted and real estate losses have broadened in the last two to three months.
``There will be a lot more cumulative deterioration in the market and foreclosure activity because of loans that were made to investors and all the subprime loans made to people with poor economic credit,'' he said.
``What's more, it is still a risk for lenders to make housing loans because housing prices are still falling.''
Moran offered an even-bleaker view: ``The declining wealth of households will weigh on the household sector for a significant time,'' he said.
``I don't think we will see vigorous spending for a long, long time because households have to repair their balance sheets,'' which have been damaged by stock market losses and lowered home values.
``I expect moderate economic activity for five years,'' Moran said.
