The Outlook for the U.S. Economy and the Housing Sector
Things are Not Good – When Will Things Bottom Out and Start to Improve?

Don Johnson, HPBA Director of Market Research

In an attempt to better understand what is currently happening in the U.S. economy, especially as it relates to the housing and remodeling sectors of interest to the hearth, patio, and barbecue industries, HPBA staff have recently been attending a number of meetings and conferences.  These include the National Association of Home Builders’ Fall 2007 Construction Forecast Conference, the Joint Center for Housing Studies Remodeling Futures Conference at Harvard University, and the fall meeting of the Construction Marketing Research Council, a group of research professionals in the building trades industry.  The goal is to get a better handle on what the experts and economists think is likely to happen in the housing and remodeling sectors of the U.S. economy in the foreseeable future. 

All of the economists and experts who made presentations at these meetings think that the housing sector, including the remodeling portion, is in a “correcting” mode at the present time.  Many of the experts also feel that the industry continues to have, as one economist stated, “downward momentum.”  Housing starts, sales, building permits, and prices are all expected to decline in 2008 as compared to 2007.

There are a number of reasons why the housing and remodeling sectors are currently in poor shape.  One of the major factors cited by many of the presenters is the mortgage credit crunch which was initiated and exacerbated by a variety of sub-prime and Alt-A mortgage lending practices.  Many of these were poorly designed and thought out, resulting in a significantly higher number of foreclosures than at any time in the recent past.  Because of this, many mortgage lending institutions are in financial difficulty, and more than a few have actually gone out of business.  And those firms that remain have significantly tightened their lending practices, resulting in fewer people qualifying for home loans and fewer lending institutions willing to finance mortgages

In addition, the foreclosures have increased the number of houses on the market, at a time when home builders were just starting to reduce the number of new homes that they were building due to changing market conditions.  It also does not help that production builders are seeing a rising number of cancellations, resulting in more homes available for sale.  In addition, the negative press generated by the media is also reducing the number of potential buyers.  Fewer qualified potential buyers, coupled with more homes on the market due to foreclosures, cancellations, and overbuilding, have resulted in an oversupply of homes available for sale which has softened and reduced the price of new and used homes currently on the market. 

One of the experts pointed out that the larger production builders are currently focused on ways to improve how they sell their homes, both those already on the market and those currently in production.  Custom or smaller builders, on the other hand, are more focused on setting their homes apart from other houses available for sale with new features, better products, improved production, and the like.  Both groups are strongly resisting lowering their home prices, preferring instead to add options/features or improve their advertising and/or marketing to prop up the perceived value of their product.  But with fewer potential buyers, more homes on the market, and tougher lending standards, this has been difficult. 

Many of the economists also pointed out that there is a direct correlation between remodeling and perceived home value – when the consumer perceives that the value of their home is stagnating, or even declining, they are less likely to remodel their home.  One major economist predicted that home prices will eventually stabilize at about 10% below the highs recorded earlier.  It was therefore no surprise that many of the experts in the industry believe that home remodeling numbers will stagnate in the relatively near future, or at least until home prices start to rise again.

The economists making presentations at these meetings generally do not think that the trouble in the housing and remodeling markets will push the U.S. economy into a recession.  As one well respected economist stated, “the overall economy and job growth continue to move ahead at a decent pace, core inflation is under control, the late-summer credit crunch in mortgage markets is showing signs of easing . . . and the supply-demand equation will be better balanced as builders begin to whittle down excess inventories.”  However, all agreed that these sectors are definitely a drag on the economy and that there is a greater possibility now than in the recent past that these sectors will lead to a recession.  In fact, many economists were somewhat surprised at how much of a drag the housing sector has been on the economy over the past few months.  When pushed as to the likelihood of a recession over the next year or so, three of the more respected economists at these meetings indicated that there was a 30% to 40% chance of a recession in the relatively near future.  It should be noted that this is a significant change from six months ago, when virtually none of the economists thought that the housing sector would drag the country into a recession. 

Many of the economic experts at these meetings feel that the Federal Reserve will lower interest rates slightly before the end of the year and/or during the first part of next year in an attempt to keep the nation from sliding into a recession.  Many also believe that once the interest rates drop, there will be little further change unless there is a noteworthy and unexpected change in the economy, one way or the other. 

How long will the downturn in the housing and remodeling sectors continue?  Most feel that the industry will bottom out in the first or second quarter of next year.  The more optimistic believe that the industry will bottom out in the fourth quarter of this year, while the more pessimistic feel that the industry won’t bottom out until the third quarter of 2008.  New and existing home sales will bottom out first, followed by new home starts.  Home prices will likely stagnate in 2008.  They will likely stabilize and start growing in 2009.  Most presenters do not feel that the industry will get back to “normal” levels until 2009. 

Long term prospects for the housing market continue to be very positive, primarily because of demographic factors.  These factors include a growing population, increasing immigration, a growing number of households, and the like.