Housing Slowdown Takes Its Toll
Economists Say Selling Prices May Stagnate,
Or Decline, in 2007 as Cool Down Continues
By PHIL IZZO
September 8, 2006
Economists believe cooling in the housing market to extend into next year and many forecasters in the latest WSJ.com survey predict no change -- or an outright decline -- in home prices next year.
Twenty-five of the 48 economists who answered the survey's question about housing predicted no change or a decline in a closely watched gauge of nationwide home prices during 2007. The average prediction for next year was for an increase of 0.43%, lifted by five economists who forecast gains of 5% or more.
The average forecast would leave home-price appreciation well below the expected rate of inflation. Just 27% of the respondents forecast an increase in home prices of greater than 2.7%, which was the economists' average expectation of the year-to-year increase in the Labor Department's consumer-price index for May 2007.
The housing market doesn't move uniformly across the country; some regions or individual cities often have price changes decidedly above or below the national average. But the economists' predictions stand in stark contrast to the red-hot price appreciation seen over recent years.
Moreover, broad-based declines in home prices are unusual. The Office of Federal Housing Enterprise Oversight's home price index, upon which the economists based their predictions, has never posted an annual decline since its first calculation, in 1975. The last time that the index trailed inflation was in 1996, when home prices rose 2.6% compared to a 2.9% inflation rate.
The Ofheo numbers are closely watched among economists as a key gauge of the housing market, though some believe the index understates weakness in the market because it doesn't reflect concessions sometimes offered by home sellers, such as help with closing costs, which are effective price cuts.
For this year, the economists forecast a 3.5% rise in the home-price index. The index rose 13% 2005 and 12% in 2004. Ofheo is the government agency that oversees mortgage titans Fannie Mae and Freddie Mac.
"The housing correction is just in its early stages now," said Joseph Carson of AllianceBernstein, who forecast a 5% decline for 2007. "Existing home prices have come down to no-change on a year-to-year basis. For new homes, prices are below year-ago levels when you include added features. The prices will have to go lower to give demand a lift in short term."
Mr. Carson expects broad-based difficulties throughout the nation. "Affordability is an issue across the board," he said, adding he believes a major correction is inevitable. "It's pretty clear now that national home prices will drop to correct housing imbalances," said Scott Anderson of Wells Fargo & Co.
Signs of cooling in the housing market have emerged in reports over recent months. Last week, David Lereah, chief economist of the National Association of Realtors, predicted that national median home prices will generally decline over the next few months. Although the group reported a slight increase3 in median home prices for July, it said that its index of pending home sales fell 7% in the month, the most recent figures available.
David Wyss, chief economist at Standard and Poor's, said he expects prices to change little nationally. He expects drops in areas that are overvalued, such as Florida, California and the Northeast, or those that are especially susceptible to economic weakness, such as the Great Lakes region.
"The most volatility will come in areas like Florida, where there are a large number of second homes and investment properties," he said. "Places like Michigan, which is seeing declining employment, will also see home prices declining."
The survey showed that economists continue to expect modest economic growth through the middle of next year. Their average forecast for third-quarter gross domestic product, the broadest measure of economic output, put growth at a 2.8% annual rate, unchanged from their prediction in a survey conducted in August. The economists shaved their forecast for the fourth quarter to 2.5% growth from the 2.6% rate they had forecast when surveyed last month.
Twenty-two of 52 economists said recession is the greatest threat to the economy over the next 12 months, compared with 14 who said inflation is the biggest threat and nine who chose stagflation, which refers to rising inflation accompanied by stagnant economic growth. The economists raised their forecasts for the likelihood of recession for a third straight time. On average, they put the probability at 26%, compared with 15% just last spring.
Implications of 9/11
As the fifth anniversary of the Sept. 11 attacks approaches, the majority of the economists, 32 of 48 respondents, said they believe the economy is now better able to withstand the shock of a major terrorist attack than it was in 2001.
Economists noted that the economy is stronger now than it was in September 2001, when it was already in recession. Some noted that the psychological impact of an attack would be less jarring, given that an attack wouldn't be the same kind of surprise that it was in 2001. Ian Shepherson at High Frequency Economics noted that corporations are generally in better financial shape now than they were then.
"Companies are taking a more conservative approach to corporate finances now," said John Lonski at Moody's Investor Service. The Sept. 11 attacks, combined with the bursting of the tech bubble, "reinforced above-average risk aversion and made suppliers of capital less willing to lend money" to unproven borrowers, he said.
The most significant lasting implication of the Sept. 11 attacks, economists said, has been the rise in oil prices that has occurred over recent years, spurred in part by conflict in the Mideast. Twenty-six of 47 economists cited oil, while three cited increased vulnerability of consumer confidence and three others selected a reduction in talented foreign workers entering the U.S. work force. Five economists said 9/11 has had no lasting implications for the economy.
"Although the human costs of the 9/11 are incalculable, the macroeconomic costs have been remarkably small," said Nariman Behravesh of Global Insight. "Both the economic costs and impact on GDP growth were much smaller than other events, such as Hurricane Katrina."
Among other findings in the survey:
• Economists appeared to be as divided as the rest of the country when it comes to politics. When asked which outcome of the midterm elections would most increase chances of legislation to reduce the long-term budget deficit, 14 answered Democratic control of both houses of Congress, while 14 said Republican control of both chambers. Ten said a split Congress would be most effective in trimming the deficit.
• The economists, on average, predict 115,000 new jobs a month will be added to nonfarm payrolls over the next year. That is the lowest forecast since the question was first asked in June 2005, and represents the sixth consecutive drop in the estimate. They expect the unemployment rate to rise slightly to 4.8% by November, up from the 4.7% level reported by the Labor Department for August. The rate is seen at 4.9% in May 2007.
• Economists cut forecasts for crude-oil prices. On average, the price of crude was seen declining to $66.95 a barrel by December, compared with an expectation last month of $69.50. It was the first time the forecast was lowered since March. The price of crude is expected to fall to $63.91 by June 2007.
Economists Say Selling Prices May Stagnate,
Or Decline, in 2007 as Cool Down Continues
By PHIL IZZO
September 8, 2006
Economists believe cooling in the housing market to extend into next year and many forecasters in the latest WSJ.com survey predict no change -- or an outright decline -- in home prices next year.
Twenty-five of the 48 economists who answered the survey's question about housing predicted no change or a decline in a closely watched gauge of nationwide home prices during 2007. The average prediction for next year was for an increase of 0.43%, lifted by five economists who forecast gains of 5% or more.
The average forecast would leave home-price appreciation well below the expected rate of inflation. Just 27% of the respondents forecast an increase in home prices of greater than 2.7%, which was the economists' average expectation of the year-to-year increase in the Labor Department's consumer-price index for May 2007.
The housing market doesn't move uniformly across the country; some regions or individual cities often have price changes decidedly above or below the national average. But the economists' predictions stand in stark contrast to the red-hot price appreciation seen over recent years.
Moreover, broad-based declines in home prices are unusual. The Office of Federal Housing Enterprise Oversight's home price index, upon which the economists based their predictions, has never posted an annual decline since its first calculation, in 1975. The last time that the index trailed inflation was in 1996, when home prices rose 2.6% compared to a 2.9% inflation rate.
The Ofheo numbers are closely watched among economists as a key gauge of the housing market, though some believe the index understates weakness in the market because it doesn't reflect concessions sometimes offered by home sellers, such as help with closing costs, which are effective price cuts.
For this year, the economists forecast a 3.5% rise in the home-price index. The index rose 13% 2005 and 12% in 2004. Ofheo is the government agency that oversees mortgage titans Fannie Mae and Freddie Mac.
"The housing correction is just in its early stages now," said Joseph Carson of AllianceBernstein, who forecast a 5% decline for 2007. "Existing home prices have come down to no-change on a year-to-year basis. For new homes, prices are below year-ago levels when you include added features. The prices will have to go lower to give demand a lift in short term."
Mr. Carson expects broad-based difficulties throughout the nation. "Affordability is an issue across the board," he said, adding he believes a major correction is inevitable. "It's pretty clear now that national home prices will drop to correct housing imbalances," said Scott Anderson of Wells Fargo & Co.
Signs of cooling in the housing market have emerged in reports over recent months. Last week, David Lereah, chief economist of the National Association of Realtors, predicted that national median home prices will generally decline over the next few months. Although the group reported a slight increase3 in median home prices for July, it said that its index of pending home sales fell 7% in the month, the most recent figures available.
David Wyss, chief economist at Standard and Poor's, said he expects prices to change little nationally. He expects drops in areas that are overvalued, such as Florida, California and the Northeast, or those that are especially susceptible to economic weakness, such as the Great Lakes region.
"The most volatility will come in areas like Florida, where there are a large number of second homes and investment properties," he said. "Places like Michigan, which is seeing declining employment, will also see home prices declining."
The survey showed that economists continue to expect modest economic growth through the middle of next year. Their average forecast for third-quarter gross domestic product, the broadest measure of economic output, put growth at a 2.8% annual rate, unchanged from their prediction in a survey conducted in August. The economists shaved their forecast for the fourth quarter to 2.5% growth from the 2.6% rate they had forecast when surveyed last month.
Twenty-two of 52 economists said recession is the greatest threat to the economy over the next 12 months, compared with 14 who said inflation is the biggest threat and nine who chose stagflation, which refers to rising inflation accompanied by stagnant economic growth. The economists raised their forecasts for the likelihood of recession for a third straight time. On average, they put the probability at 26%, compared with 15% just last spring.
Implications of 9/11
As the fifth anniversary of the Sept. 11 attacks approaches, the majority of the economists, 32 of 48 respondents, said they believe the economy is now better able to withstand the shock of a major terrorist attack than it was in 2001.
Economists noted that the economy is stronger now than it was in September 2001, when it was already in recession. Some noted that the psychological impact of an attack would be less jarring, given that an attack wouldn't be the same kind of surprise that it was in 2001. Ian Shepherson at High Frequency Economics noted that corporations are generally in better financial shape now than they were then.
"Companies are taking a more conservative approach to corporate finances now," said John Lonski at Moody's Investor Service. The Sept. 11 attacks, combined with the bursting of the tech bubble, "reinforced above-average risk aversion and made suppliers of capital less willing to lend money" to unproven borrowers, he said.
The most significant lasting implication of the Sept. 11 attacks, economists said, has been the rise in oil prices that has occurred over recent years, spurred in part by conflict in the Mideast. Twenty-six of 47 economists cited oil, while three cited increased vulnerability of consumer confidence and three others selected a reduction in talented foreign workers entering the U.S. work force. Five economists said 9/11 has had no lasting implications for the economy.
"Although the human costs of the 9/11 are incalculable, the macroeconomic costs have been remarkably small," said Nariman Behravesh of Global Insight. "Both the economic costs and impact on GDP growth were much smaller than other events, such as Hurricane Katrina."
Among other findings in the survey:
• Economists appeared to be as divided as the rest of the country when it comes to politics. When asked which outcome of the midterm elections would most increase chances of legislation to reduce the long-term budget deficit, 14 answered Democratic control of both houses of Congress, while 14 said Republican control of both chambers. Ten said a split Congress would be most effective in trimming the deficit.
• The economists, on average, predict 115,000 new jobs a month will be added to nonfarm payrolls over the next year. That is the lowest forecast since the question was first asked in June 2005, and represents the sixth consecutive drop in the estimate. They expect the unemployment rate to rise slightly to 4.8% by November, up from the 4.7% level reported by the Labor Department for August. The rate is seen at 4.9% in May 2007.
• Economists cut forecasts for crude-oil prices. On average, the price of crude was seen declining to $66.95 a barrel by December, compared with an expectation last month of $69.50. It was the first time the forecast was lowered since March. The price of crude is expected to fall to $63.91 by June 2007.
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