A Dose of Reality for the Housing Market

Economist discusses depth of correction this year.
RISMedia
“The housing market continued to dazzle with its resilience in 2005, despite widespread expectations for a correction.

Home sales and starts surged to record highs, home values skyrocketed, and speculators continued to place aggressive bets," says Diane Swonk, chief economist of Mesirow Financial, in her April issue of Themes on the Economy available here.

"Speculation played a much larger role that we would like, with mortgages used for investment purposes rising to a record-breaking 12.1% of the market in the fourth quarter. This leaves us worrying about the magnitude of a market correction, now that cancellations for new homes-largely condos-are on the rise, and speculative investment appears to be cooling," notes Swonk.

In her April newsletter, Swonk discusses the housing market, the depth of the correction in 2006, and what that slowdown will mean for the rest of the economy.

- Sales. "Home sales are forecast to slide a little more than 8% from
2005 in 2006, with much of the slowdown occurring in the second half.
Sales actually surged a bit at the start of the year in response to
unseasonably warm winter weather, which increased buyer traffic;
however, some of those gains are now being given back."

- Starts. "Housing starts are forecast to drop at a more aggressive 11%
rate in 2006 from 2005. The give back to early weather-related is
expected to be greater for starts than it is for sales."

- Appreciation. "Median single-family home prices are forecast to rise
7% in 2006, a sharp slowdown from the almost unbelievable and
unsustainable 12.8% pace of 2005, but still respectable ... Other
factors dampening appreciation include: rising energy prices; the
Alternative Minimum Tax Rate; and, a push by realtors to lower
sellers' expectations."

- Residential Investment. "Actual construction activity is expected to
slow much less than starts in the year ahead, supported by the need to
complete projects that were already started."

- Consumer Spending. "Home buying is the single largest trigger of other
types of consumer spending ... so it follows that it should slow along
with housing, which is forecast to do in both 2006 and 2007."

- Defaults, delinquencies, and foreclosures in the housing market are
expected to rise fairly dramatically over the next several years.

"The worst of the problems associated with a slowdown in housing are expected to be felt in 2007, not in 2006 ... However, the real test of the credit worthiness in the of the national mortgage market will not occur until unemployment rises and the economy slips into a recession later in the decade," concludes Swonk.

The April issue of Themes on the Economy as well as archived issues can be found at www.mesirowfinancial.com.

Mesirow Financial is a major independent financial services firm offering Investment Management, Investment Services, Insurance Services, Investment Banking, Consulting and Real Estate.

Founded in 1937, Mesirow Financial is an employee-owned, private company with more than 1,000 employees in 29 offices across the country and in Puerto Rico. The firm has $25.5 billion in assets under management, advisory and custody and nearly $150 million in capital. For more information about Mesirow Financial, visit its Web site at www.mesirowfinancial.com.