Economists who just three months ago saw little but gloom and doom ahead for the housing industry have changed their tune: They're predicting that an upturn in housing — and the U.S. economy — is near.
“A lot of the time I am pessimistic, but I'm going to be an optimist,” said Mark Zandi, chief economist and co-founder of Moodys.com in West Chester, Pa. “I think home sales bottomed in the first quarter [of 2009], housing starts will bottom in the second quarter and housing prices will hit bottom in the fourth quarter” at a level 36 percent lower than their peak in December 2006.
Speaking at the National Association of Home Builders spring construction forecast conference April 23 in Washington, Zandi credited federal policies initiated by the Obama administration for the changing climate.
“The administration's housing policy is reasonably good,” Zandi said. “Their loan-modification program and mortgage refinancing program will ease the pressure of foreclosures,” which have inflated housing supplies and lowered prices, he said.
“Fixed-mortgage rates are at an all-time low and will stay below 5 percent for quite some time, and we are at the low point in terms of available credit,” Zandi said. “That combination will prompt more home sales as we make our way to the end of the year,” further aided by the fact that ratio of house prices to income is “now back to where it was early in the decade.”
Other economists at the conference echoed his views.
Like Zandi, NAHB chief economist David Crowe believes that the first quarter of this year marked the trough for new-home sales, and that housing starts will bottom out in the second quarter.
“There are still a lot of skeptics because of the deep hole we are in,” said Crowe, noting that the number of vacant homes for sale and rent is now 2.2 million higher than normal, compared with just 1.5 million three months ago. “But I think this housing recession is nearing an end. If our forecast holds true, we are past the worst.”
Zandi, Crowe and other economists are optimistic because of low mortgage rates, an easing of the credit crunch, federal government initiatives to forestall home foreclosures and refinance mortgages, and a belief that the $800 billion federal economic stimulus bill will help save some U.S. jobs.
“There are some signs that the worst of the economic decline is over,” said Crowe, despite quarterly declines of 6.3 percent and 5 percent in the gross domestic product in the fourth quarter of 2008 and the first quarter of 2009, and job losses totaling 5 million since December 2007.
“We are predicting slightly less than a 1 percent decline in the second quarter and then we will see GDP begin to pick up,” he said. “Job losses will continue, but they will temper. The number of jobs lost will be less each month … and there will be some gains in early 2010.”
Maury Harris, chief U.S. economist for UBS Investment Bank in New York, agreed.
“I am finally turning into an optimist again, after I changed my mind about being optimistic in late 2007,” he said. “It will not be much of an economic recovery, but I believe we can pull out of this in the second half of the year.”
Harris predicted a 2 percent decline in GDP in the second quarter, then growth of 2 percent in the third quarter, 2.5 percent in the fourth quarter and 2.2 percent for 2010. He said unemployment will peak at 9.3 percent in the fourth quarter and housing starts will fall from 900,000 in 2008 to 530,000 this year, then rebound to 720,000 in 2010.
“The near-term-forecast risks are on the downside,” Harris said. “We are getting help from the economic stimulus package, and there has been a tremendous amount of inventory liquidation by businesses in the first quarter that will have to be refilled. We are not getting rid of the credit crunch anytime soon, but the credit crunch is gradually waning.”
One reason for that change is that the Federal Reserve Board has dropped its federal funds rate to one-quarter of a point and is “focused on getting money back into consumer hands,” said James Glassman, managing director, senior economist and senior policy strategist for J.P. Morgan Chase & Co. in New York.
“We are in the process of a transition and it won't be long before we start to see some sort of a recovery,” Glassman said. “I am pretty sure that by fall we will be moving in the right direction and that consumer spending will be rising by the first quarter of next year.
“Going forward, I expect to see the drag from the housing sector slow down and then become positive. We are going to see signs in the coming months that the correction is largely behind us.”
Still, the path to recovery won't be completely smooth, Zandi warned. “We will see big declines in housing values over the next two to three quarters, and foreclosures will go skyward over the next couple of months,” until the administration's plans make an impact and foreclosures peak in the first quarter of 2010, he said. “But we will make real progress and work off this inventory in the next 18-24 months,” he added.
“Prices will be flat in 2010 and rise at a modest rate in 2011 and 2012,” Zandi said. “It will be more than a decade before prices get back to their 2006 peak.”