Is Housing Out of the Woods?

A growing chorus of experts says the worst may be over for home sales. But the recovery may not be smooth—or quick

by Marc Hogan

Depending on whom you ask, the winds may already be shifting for the housing market. All year, economists have warned of a bursting housing bubble and its potential impact on economic growth (see BusinessWeek.com, 8/21/06, "Why Housing Looks a Little Rickety"). However, a recent stream of encouraging data has some prominent prognosticators changing their tune.

One of the first in line was Alan Greenspan. As recently as May 18, the former Federal Reserve chairman put an exclamation point on the housing slowdown when he declared, "The boom is over." But now, the "worst may well be over," Greenspan was quoted as saying Oct. 7, after mortgage applications posted their biggest weekly gain since June, 2005.

A growing number of economists and analysts have come around to the ex-Fed chief's view. Some investors may see sunnier skies too, as homebuilding stocks such as Lennar (LEN), DR Horton (DHI), and Pulte Homes (PHM) have rebounded since touching 52-week lows in July. Reports on existing home sales for September, scheduled for release Oct. 25, and new home sales Oct. 26 could shed more light on housing's status.

Leveling Out?

While the most bearish scenarios may be becoming increasingly unlikely, the housing market probably isn't out of the woods yet. Even the most upbeat forecasts call for new-home construction to keep declining nearly as much as it already has so far. Meanwhile, underlying economic figures may contradict their milder headlines.

Greenspan's assessment followed on the heels of Fed Vice-Chairman Donald Kohn's suggestion Oct. 4 that "[housing] starts may be closer to their trough than to their peak." The data since then could give bulls even more reason for guarded optimism. On Oct. 17, the National Association of Home Builders' housing-market index rebounded to 31 from 30 in September, snapping a 12-month decline from 68 a year earlier. A day later, a Commerce Dept. report showed housing starts rose 5.9% in September, to an unexpectedly strong pace of 1.772 million units.

"The point of maximum deterioration in housing activity has probably passed," says Jan Hatzius, chief U.S. economist at Goldman Sachs (GS), in an Oct. 20 report. "The sharp downturn of the past year seems to have brought total housing starts—single-family starts, multi-family starts, and mobile-home shipments—close to the level justified by the underlying demographics."

Permit Plunge

Still, Hatzius comes up with plenty of caveats. Housing activity could drop by another 300,000 housing starts, he projects, as homebuilders work off unwanted inventory and buyers shift from single-family units to multifamily and mobile homes. That would come on top of a decline of 400,000 housing starts already, Hatzius says.

Others maintain that the housing downturn still has a long way to go. "Commentary suggesting housing demand is recovering, based on the latest homebuilder and mortgage applications readings, appears to be more wishful thinking than fact," says Keith Hembre, chief economist at First American Funds, in an Oct. 20 report.