The real estate market is gliding toward a soft landing in 2006, according to a Wall Street economist and a real estate economist who discussed the issue in a national teleconference Tuesday.
What was billed as a debate between Wall Street and Main Street sounded more like a duet by the time David Seiders, chief economist for the National Association of Home Builders, and James Glassman, senior economist for JP Morgan Chase, ended the NAHB-sponsored teleconference.
“I do foresee weakening of the housing sector, but this should be a simmering-down process toward a more realistic condition, not part of a classic housing downswing leading to a recession,” Seiders said.
The economist predicted that housing prices, which he said increased about 11 percent nationally this year, would increase about 6.5 percent in 2006 and about 4.4 percent in 2007.
Seiders said this was because growth in the Gross Domestic Product would be strong, though not as strong as in 2005, and job creation would happen at roughly the same pace as it did this year.
Also, “interest rates will be up some, approaching 6-3/4 by the year,” Seiders said. “Single-family home sales, single-family home starts will be moving down,” he said.
“Given the numbers, I’m looking for housing to swing from a strong growth engine of the GDP to a drag in 2006,” said Seiders.
Giving the Wall Street perspective, Glassman said, “There are two things most Americans know about: the price of gas and the price of real estate. From train talk, anecdotes, we all sense the market shifting to a buyer’s rather than a sellers’ market.”
Glassman predicted that home price appreciation would slow from double digits to single digits, hovering in the 5 to 8 percent range.
Citing inflation as one of the most critical influences on housing, Glassman said inflation “has been creeping down all year long,” and is actually at the low end of the Federal Reserve’s comfort zone at 1-3/4 percent. “In my mind, inflation is the dramatic story of the year and makes me optimistic for next year,” Glassman said.
The economist also cited employment as another critical factor for the housing market.
“I think we’re not at full employment yet,” Glassman said. “Some say we’re at full employment, but if that is the case, why is it that wage and salary income is at a record low? If we had a tight economy you wouldn’t see that.”
Saying, “We have a way to go,” Glassman characterized the economy as “a pretty good backdrop for growth over the next few years.”
Both economists agreed that interest rates, which the Federal Reserve’s overnight funds rate raised to 4.25 percent Dec. 13, the 13th increase since June 2004, won’t go up much more.
“I agree that the Fed is just about done raising interest rates,” said Glassman. “Why would the Fed need to drive short-term interest rates up above long-term unless they see glaring inflation?”
He was referring to the fact that 10-year bond rates are currently at 4.5 percent.
“It looks to me like a pretty good – if not boom-y – outlook,” said Glassman.
Federal financial regulatory agencies Tuesday issued proposed guidance on so-called “exotic” mortgage products such as interest-only loans, and a caller asked the two economists their opinions on the development.
“Everyone knew it was coming. It doesn’t sound like a blockbuster; it’s not a regulation,” observed Seiders.
“My understanding is that a lot of these kinds of loans have been made in the private asset securities market, outside of regulated institutions. It’s a murky area right now,” said Glassman.
The two were also asked if appreciation in the nation’s most overheated markets, such as New York City and Southern California, would be in line with the numbers they had projected, or if there was any chance of prices falling.
“The Federal Deposit Insurance Corporation put out a publication about this in May,” said Seiders. “The FDIC found that in places that get into boom conditions, unless you have an economic setback caused by something else, prices decelerate but don’t’ fall at all. Household income keeps growing, supply keeps growing and you get a balance that way.”
The economist added, “Over the years we have seen prices decline, but it was linked to deceleration in the economy.”
Hedging their bets, the two concluded on an optimistic note with a few qualifiers.
“The role of investors, how much buying activity was added in 2005 by investors with no intention to occupy or even rent units, and how many units might come out of their hands – that’s the downside risk,” said Seiders. He pointed out that “in 2005, the threats to the overall economy we were worried about, oil prices and so forth, seem to have faded.”
According to Glassman, “The downside risk is that we might get more of a correction if the market slows down. But at the end of the day, the U.S economy has impressed me in how flexible it is. Overall, it’s a pretty good picture.”
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