DAVID W. BERSON
Decline ‘isn’t over yet’
The Bay State’s new-home sales market will be worse off than the nation’s this year, according to an economic forecast presented to local homebuilders.
Sales of new homes in Massachusetts will be sluggish because of weak job gains, slow population growth and declines in housing affordability, according to Fannie Mae Chief Economist David W. Berson. Berson presented his housing industry forecast at a dinner organized by the Builders Association of Greater Boston last week.
Nationwide, new-home sales fell almost 18 percent last year and are expected to fall another 7 percent to 8 percent this year, Fannie Mae projects. Housing starts are forecast to fall about 15 percent this year and home values are expected to drop nationally this year for the first time since World War II, said Berson. A 1 percent decline in home prices is projected nationally.
“The decline in the housing market isn’t over yet,” said Berson. “But the worst declines are behind us – at least the worst declines in sales. We still have more to go with prices.”
Berson’s remarks to the builders association came a day before government figures showed a plunge in new-home sales in January. New-home sales in January fell 16.6 percent from December 2006 to an annual rate of 937,000, according to a report the U.S. Commerce Department released last Wednesday. It was the biggest drop in monthly numbers in 13 years.
Faced with a slower sales pace and a rise in cancellations, some national and local homebuilders last year discounted prices and offered various incentives to entice homebuyers. Some of the nation’s leading builders, including Pulte Homes, Toll Bros. and KB Home, have reported losses and weakness in prices.
Some analysts say the housing market is nearing the bottom, but others contend that homebuilders will face challenges this year because demand is slow and the inventory of unsold newly built homes is still large.
Even though the national economy grew last year, the job market was fairly solid and housing demographics were positive, there was a significant drop in housing affordability, which helped push home sales down last year, explained Berson.
“Affordability had been at very high levels until about two years ago, when it started to go down. Why did it drop? It fell in part because interest rates went up. That was only a small part of the decline. The biggest reason was the run-up in prices,” he said.
But with price appreciation easing in 2006 – and prices declining in some parts of the country – housing affordability conditions have started to improve. If mortgage-interest rates and prices don’t rise, housing affordability will continue to increase, suggesting that “the drop in core housing demand is just about over or may in fact be completely over,” Berson said.
‘Way Out of Whack’
Locally, however, the outlook for the homebuilding industry is grimmer.
“The job market in Boston is worse than the national level. Affordability in Boston is worse than the national level. Demographics in Boston are much worse than the national level. If it weren’t for international immigration, you would see huge population declines in the city and state,” said Berson. “So while core housing demand may have bottomed – be close to bottoming – in the country, I’m not sure that’s true here in Boston.”
But Berson said one caveat is that the investor share of the housing market locally was lower than in other parts of the country. Berson expects home sales nationally to decline as investors start pulling out of the market in greater numbers this year.
A bright spot, according to Berson, is that the inventory of unsold homes is starting to go down in some parts of the country partly because of a recent pickup in home sales. High inventories in many areas, including Massachusetts, helped put downward pressure on home prices last year.
Margaret Whelan, a global housing analyst for UBS Investment Bank who also presented her outlook for the housing market, said household formation and employment growth nationally is growing more rapidly than housing stock – pointing to a demand for housing.
“I continue to believe that [over the next five years] there will be demand for 2 million new homes to be built in the [United States],” she said.
Whelan said that overbuilding has taken place in the last three to four years, in part because of speculative building. There are currently 2.2 million vacant homes, compared to an average of about 1 million vacant homes four to six years ago. That suggests there is an overhang of about 1 million homes, Whelan said.
Whelan presented a chart that showed that the year-over-year inventory levels in top 50 metropolitan statistical areas were up 27 percent.
While statistics from the U.S. government might indicate that the country is seeing 1 million new-home sales, the number doesn’t take into account cancellation rates, explained Whelan.
The statistics reflect signed purchase-and-sale contracts, but a number of buyers have had to pull out of deals because they haven’t been able to sell existing homes, according to analysts.
Whelan said the public builders she works with are reporting cancellation rates nearing 40 percent.
“Ultimately, demand is not 1 million homes today. Demand is 600,000. So demand is way out of whack relative to the supply,” she said.
Still, Whelan added that looking at total housing units relative to household formation in recent years, it’s clear that there’s less housing stock available today.
“It feels like there’s a huge bubble. It feels like there’s a big overhang, prices are going to collapse, it’s going to go on forever Â… it’s not actually that bad,” she said.
