Seiders' short-term forecast is based on several assumptions: skillful management of monetary policy by the Federal Reserve, maintenance of solid growth in personal income and employment, a manageable wave of home mortgage foreclosures and better performance of mortgage markets going forward.
However, he observed that the long-term potential for housing activity is very good. "By the end of 2009, we may be at a pace of 1.5 million units of new-housing production (including manufactured homes). Once we are out of the woods, we should see good growth in front of us — maybe 2 million per year."
Agreeing that the housing market trough is in sight, Maury Harris, managing director and chief economist at UBS Investment Bank, said that he sees "housing bottoming out in the first half of 2008 and starting to pick up in the second half of the year."
The last time a housing recession was this serious was in the mid-1960s, Harris said, but the big difference between then and now is that "the Fed is not dealing with inflation."
Like Seiders, he sees the federal funds rate dropping to 4.25 percent by year-end and holding steady through 2008.
In forecasting total housing starts of 1.37 million this year and 1.24 million in 2008, Harris said that the housing recovery will be hampered by what he says will be 500,000 foreclosures on subprime and Alt-A loans both this year and next.
"The foreclosures aggravate the inventory situation and weigh on the market more than in past cycles," he said.
Media coverage exaggerated
Taking what he characterized as a "less negative" spin on the housing market, Michael Moran, chief economist of Daiwa Securities America Inc., said that most of the reporting in the media is "exaggerated" and "sensationalized."
Specifically, he cited the subprime mortgage arena, which makes up 13.5 percent of the market, as opposed to prime lending, which constitutes a 75 percent market share.
"Twenty percent of the subprime market is under stress," said Moran. "Twenty percent of 13 percent is less than 3 percent of the total mortgage market. The economy should absorb this shock."
Commenting on the huge run-up in home prices that occurred in many housing markets between 2000 and 2005, Moran characterized the current home price adjustment as "not especially alarming."
"We are seeing a gradual correction in home prices," he said. "So far, in my view, housing prices are holding up reasonably well."
As for the high number of foreclosures expected this year and next, Moran said the economic fallout will not be as severe as many analysts anticipate because the vast majority of the affected home owners made little or no downpayment on their houses and will walk away without much of a loss.
"The big financial institutions will absorb these losses, but they have the capital to do it," he said.
Moran forecast that housing starts would bottom out in the third quarter of 2008 at a rate of 1.25 million units.
