All Bets Are Off for Housing Sector Recovery

Housing Slide Continues in April as Inventory Remains High and Demand Soft

The U.S. housing market continues to search for a bottom. The latest housing figures for April show prices, sales, building permits, housing completions and industry confidence all continuing to deteriorate. The continued weakening also has analysts and economists adjusting their forecasts for the rest of the year downward - again.

The national median existing single-family home price fell to $212,300 in the first quarter, down 1.8% from a year ago when the median price was $216,100, according to the National Association of Realtors.

Total existing-home sales were down 6.6% in the first quarter compared to a year ago.

Privately-owned housing units authorized by building permits in April were down 8.9% from March and 28.1% from a year ago.

Privately-owned housing completions in April were down 5.8% from March and 26% a year ago.
While the NAR points out that 82 of 145 metros showed price increases from a year ago, the organization also notes that the largest single-family home price increase were in out of the way areas or severely depressed markets. For example in the Cumberland area of Maryland and West Virginia, the median price of $100,000 was 17.1% higher than a year earlier. Next was Beaumont-Port Arthur, TX, at $115,800, up 16.5% from the first quarter of 2006, followed by the Gulfport-Biloxi area of Mississippi, where the first quarter median price increased 15.7% to $153,700.

More typical of the major housing markets is what has been occurring in Florida.

Statewide, sales of single-family existing homes totaled 33,748 during the three-month period, a decrease of 26% compared to the same time a year earlier, according to the Florida Association of Realtors.

The statewide existing-home median sales price was $237,000 in the first quarter; a year ago, it was $243,500 for a decrease of 3%.

"The bottom line for housing is that it has had a significant depressing effect on real GDP growth over the past six months or so," said Janet L. Yellen, president and CEO of the Federal Reserve Bank of San Francisco. "While I wouldn't be surprised to see it begin to turn around in the latter half of this year, I also wouldn't want to bet on it. In other words, housing remains a significant drag on the economy."

Residential investment contracted at a 17% annual rate in the first quarter, knocking off about 1 percentage point from annualized real GDP growth, according to the San Francisco Fed. In the fourth quarter of last year, residential construction fell at a rate of more than 19%, trimming overall growth by about 1.25 percentage points.

There is still the risk that residential investment will slip further given the sizeable overhang of inventories of unsold new single-family homes, the rise in the homeowner vacancy rate, the still weak demand for single-family houses, and the tightening of credit conditions for home mortgage borrowers, the San Francisco Fed said.

As a consequence this week, the National Association of Realtors revised its housing forecast for the year, saying it expected it to be "somewhat lower," due in part to stricter lending standards and the evaporation of subprime mortgage origination.

Existing-home sales are now projected to total 6.29 million this year and 6.49 million in 2008, compared with 6.48 million last year. New-home sales are projected at 864,000 in 2007 and 936,000 next year, lower than the 1.05 million in 2006. Housing starts should total 1.46 million units this year and 1.52 million in 2008, down from 1.8 million last year.

The 30-year fixed-rate mortgage should rise slowly to 6.5% by the fourth quarter. Last week, Freddie Mac reported the 30-year rate was 6.16%.

Ongoing concerns about subprime-related problems in the mortgage market have also caused builder confidence about the state of housing demand to erode, according to the National Association of Home Builders/Wells Fargo Housing Market Index.

The index is at its lowest level in its current cycle, which was previously hit in September of 2006.

"Builders are feeling the impacts of tighter lending standards on current home sales as well as cancellations, and they are bracing for continued challenges ahead," said Brian Catalde, NAHB president and a homebuilder from El Segundo, CA.

"The crisis in the subprime sector has infected other parts of the mortgage market as well as consumer psychology, and as a result the housing outlook has deteriorated," added David Seiders, NAHB chief economist. "We're now projecting that home sales and housing production will not begin improving until late this year, and we're expecting the early stages of the subsequent recovery to be quite sluggish. There still are tremendous uncertainties regarding our baseline forecast going forward, owing largely to the subprime crisis that is having widespread effects throughout the mortgage market."

More telling perhaps are the adjustments homebuilders are making to their original forecasts.

"Twenty months into this housing downturn, we continue to face difficult conditions in most of our markets, said Robert I. Toll, chairman and CEO of Toll Brothers Inc. "Although there is variation among markets, our traffic this quarter on average has been flat on a gross basis and down approximately 20% on a per community, same-store basis, compared to last year's second quarter."

"Given the current state of the market, we no longer expect to achieve the most recent guidance we provided when we announced first quarter earnings," Toll added.

Going into the year, Toll Brothers estimated it would take about $60 million in impairment charges this year. It will blow way through that before midyear.

"While we have not yet finalized our analysis, we estimate that write-downs pretax in the second quarter will be between $90 million and $130 million, nearly all of which are impairments on communities we already own," Toll said. (costar.com)