2008 Housing Forecast for homebuilders

We used NAHB data of single-family housing starts to calculate the percentage change from the actual 2007 starts to predicted 2008. Forecast: still gloomy. San Diego and, not surprisingly, New Orleans are set to lead, with Orlando taking the biggest hit.

The national median existing single-family home price was $223,800 in the second quarter of 2007, down 1.5 percent from the second quarter of 2006 when the median price was $227,100. They are expected to inch back up in 2008, but just a mere 1.2 percent, according to an NAR forecast.

Most of the metro areas saw modest price declines, although four areas experienced double-digit drops.

"People do see the home prices coming down," says James Haughey, chief economist at Reed Construction Data. But part of the problem, he says, is the media focusing on "those cities that were plunging and not the other cities that were doing well. So it scares potential buyers and makes them think if they wait another month they will get a better deal. And as soon as people don't believe that anymore, prices will come up."

In the second quarter, the largest single-family home price increase was in the Salt Lake City area, where the median price of $233,100 rose 21.9 percent from a year ago. Next was Binghamton, N.Y., at $111,200, up 19.8 percent from the second quarter of 2006, followed by Salem, Ore., where the second quarter median price increased 16.7 percent to $227,900, according to NAR.

The best total sales performance was in Wyoming, where existing-home sales rose 10.8 percent from the second quarter of 2006. NAR also reports that in Iowa, the second-quarter sales pace rose 4.1 percent from a year ago, while North Dakota experienced the third strongest gain, up 2.9 percent. Oklahoma, Indiana and Nebraska also posted annual sales gains.

In the Midwest, total existing-home sales dropped 8.4 percent to a 1.39 million-unit annual level in the second quarter compared with a year ago. The median existing single-family home price in the Midwest was $163,500, down 2.2 percent from the second quarter of 2006, according to NAR.

Mortgage lenders will be tightening their purse strings further come 2008 to reverse the damage the recent rise in non-prime lending and the proliferation of alternative mortgage products caused.

Mortgage production, already down about 15 percent to $2.31 trillion in 2007 from $2.73 trillion in 2006, will decline another 18 percent in 2008 as both purchase and refinance originations drop, according to data from the Mortgage Bankers Association.

After all, the recent spike in foreclosures across the U.S. was caused in part by the extension of loan products that the borrowers did not have the capacity to repay, say experts. Consider that subprime lending soared from near-zero in the early 1990s to 8.6 percent of originations in 2001 and 20.1 percent in 2006.

Although sub-prime and alternative products will be offered at lower rates over the coming years because lenders are hoping to recoup their losses, Scott Anderson of Wells Fargo says it is also because some of the lenders most responsible for these types of loans have shut their doors.

"Of the top mortgage lenders, 35 have already closed, filed for bankruptcy or been sold," Anderson says. "Only two of the Top 10 mortgage originators left standing still hold highly risky mortgage portfolios."

Lenders will also be raising their rates slightly over the next few months. The average mortgage rate for 2007 is 6.4 percent and is expected to rise to 6.7 percent in 2008. Lenders view higher rates as a way to shut out some of the higher risk borrowers, although builders and real-estate agents would prefer to see rates come down as a way to entice buyers to enter purchasing agreements.

Home building and remodeling account for two-thirds of domestic lumber consumption, according to NAHB. As housing starts drop — thus creating an increase in inventory of building supplies — it's no surprise that prices for some major home building materials have also continued to fall. In 2008, smaller price drops are likely before they creep back up, but at a slower pace, says Haughey.

Currently, gypsum products are down 22 percent from a year before, softwood lumber is down 3.8 percent and insulation materials are down 4.4 percent. The decline in September from August was 1.9 percent for roofing, 1.5 percent for gypsum products and 1 percent for softwood lumber.

"These declines were likely prompted by another round of surplus inventory and price cutting when the sub-prime mortgage problems steepened the decline in housing starts during the summer," says RCD's Haughey.

"But when you add up the costs of all materials for single-family construction, prices are up for materials 1.9 percent from the last year but unchanged for the last few months," he says. "Prior to that the total price was up about 6 percent a year."

In doing their part to correct the fall of the housing market, manufacturers are giving builders a good deal when they do have an order, says Haughey. "The problem is convincing people it is a good time to buy if you don't own a home you have to sell."