David Seiders, chief economist for the National Association of Home Builders, said he expects new-home sales to drop 12 percent this year compared to a record 1.28 million units in 2005.

New-home sales in the first quarter of this year were down 10 percent from fourth-quarter 2005, and he said he expects sales to ease further in the coming months before leveling off in 2007. Seiders spoke Thursday during a National Association of Home Builders Construction Forecast Conference in Washington, D.C.

Rising interest rates, affordability problems and the flight of investors and speculators have contributed to a softening demand for housing, economists said at the conference, according to an announcement by the home builders group.

“After topping out in the third quarter of last year, it is pretty clear that the housing sector is in a period of transition. Sales and starts are trending lower toward more sustainable levels,” Seiders said. “Hopefully, most of this decline will be due to investors and speculators stepping out of the market. What we don’t want to see is investors dumping homes on the market.”

Michael Moran, chief economist at Daiwa Securities America Inc., said, “The housing sector is going through an adjustment, not a collapse.”

Taking a bullish view on the current economic and inflation outlook, Jim Glassman, managing director and senior policy strategist with JP Morgan Chase & Co., said these factors will bode well for housing.

“Real estate is pricing itself back to reality and in the long-run it is reasonable to expect starts in the 1.8 million to 2 million range,” Glassman said. “Housing won’t continue to make the same contribution to the economy that it has. But when I think about where the economy is, I think we’re in the fifth inning with a good chance of going into extra innings. This expansion may prove to be the longest one ever seen.

“Inflation is key to the longevity in the current economic expansion and to the underlying health of the building business,” he said.

Economists agreed in their prediction that the Fed will raise its benchmark short-term rate to 5 percent at its May 10 meeting, which would be the 16th consecutive quarter-percentage point increase since the Fed started lifting it from 1 percent in June of 2004.

Both Seiders and Glassman said they believe the 5 percent mark should be enough to ease inflationary pressures in the months ahead and to keep the Fed from moving forward with additional rate hikes. But Moran, citing higher energy prices and an unemployment rate of 4.7 percent, said he predicts the central bank won’t stop until it raises the federal funds rate to 5.5 percent.

After posting a record 1.72 million single-family starts in 2005, NAHB is predicting that new-home construction will ease to 1.6 million units in 2006 and 1.49 million in 2007. Home-price appreciation is expected to fall from an average 12 percent in 2005 to about 4 percent in 2007, Seiders said, and mortgage rates are expected to rise up to 6.7 percent later this year.

The multifamily market has remained “eerily stable” since the late 1990s, he also noted, and is expected to continue the same pattern in 2006, with starts dropping slightly to 351,000 apartment units from 355,000 last year.

The rental market should regain some ground while the condo markets cools, he also said. Remodeling expenditures should continue to rise, in part because “an immense amount of home equity will continue to support this spending,” he said.

Bernard Markstein, NAHB’s director of forecasting, said that the forces driving housing demand vary significantly by region. Home prices, population growth, household formation, and growth in employment opportunities are among the drivers, he said, and other factors include immigration and migration, energy prices, large-scale natural disasters such as Hurricane Katrina, and an area’s appeal as a second-home location.

Mark Zandi, chief economist for Moody’s Economy.com, said that “builders have done a pretty good job of matching supply and demand” and that “nationally, house prices and supply will go flat in 2006, 2007 and 2008,” which implies that there will be some price declines in key markets and that markets are going to “correct, not crash.”

Markets where Zandi anticipates significant corrections – more than a 10 percent peak-to-trough decline – are in the Northeast, the Mid-Atlantic, Florida, California, parts of Arizona, and Las Vegas.

“Any fundamental rise in interest rates will bite hard,” Zandi said. “The rise will lock out two key groups that are important to local and regional markets: first-time home buyers and investors.”

Thomas Lawler, a housing and mortgage market consultant who worked for Fannie Mae for 22 years, said there was not a national housing bubble, though regional bubbles do exist. “Nationwide, no. But in some regions, absolutely.”

Lawler, who spoke on house prices and local dynamics, said, “all of the signs of a bubble were present: a surge in speculative investing; a surge in innovative financing; easy credit and loose underwriting; home inspection waivers; and home purchases sight unseen. You had to be ‘on something’ not to see a bubble in some areas,” he said.

“Housing is the most interest-rate-sensitive industry in the country,” said Frank Nothaft, vice president and chief economist of Freddie Mac. “Mortgage interest rates, home prices and family incomes – these are the three ingredients that families think about when deciding to buy a home.

“We expect mortgage interest rates to rise slowly through the end of 2006, but they’ll still remain well below historical norms,” Nothaft said. “The affordability problem is a function of increases in home prices.”

Among families with prime mortgages, 87 percent of the loans are fixed-rate. “So even if the Federal Reserve continues to raise interest rates, most American families will be insulated because they have fixed-rate mortgages,” he said.

Scott Anderson, senior economist for Wells Fargo & Co., said, “It should be no surprise that the housing market is going to slow down. The federal reserve is doing its best to take away the punch bowl.”

The NAHB Construction Forecast Conference was sponsored by the National Council of the Housing Industry, the Supplier 100 of NAHB, Wells Fargo Home Mortgage, Fannie Mae and Countrywide Home Loans.

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Send tips or a Letter to the Editor to glenn@inman.com or call (510) 658-9252, ext. 137.

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