Builder - January 2009 - (Page 172) FLYING BLIND BY BOYCE THOMPSON I LLUSTRATIONS BY JACK UNRUH A confluence of unprecedented events makes forecasting housing starts highly speculative. W hen economic growth was stable and home investments produced steadily rising returns, forecasting housing starts was pretty straight forward. Economists input their best educated guesses for interest rates, economic growth, and job creation. Models produced a projected fl ight path for sales and starts. Sometimes, that was the one the industry actually flew, or pretty close to it. Today’s volatile economic environment renders moot many forecasting models. Not only are traditional housing variables less predictable due to unprecedented actions— mortgage rates dropped 750 basis points in December after the Fed pledged to buy bad mortgage assets—but the industry’s foundations have permanently shifted. Home buyers could always count on rising investment returns. Now home values are in free fall. Housing forecast models “don’t work,” Fannie Mae’s chief economist Doug Duncan said at last fall’s NAHB Construction Forecast Conference. Econometric models use the past to predict the future, but there’s no precedent for current housing conditions. Economists, Duncan pointed out, never had to forecast a housing recovery after so many people put so little down to get mortgages and when capital gains have been “decoupled” from real estate. Before homes became ATMs, home sellers had to roll over capital gains into real estate to avoid taxes. Several other landmark changes conspire to cloud crystal balls. For the last 15 years, builders could count on reasonable access to financing. Now the banking system sits with two broken axles, mortgage and construction lending at a standstill. As banks resort to government bailouts, the list of failed and troubled institutions grows every month, and hundreds of billions of bad assets sit on bank balance sheets. Lenders won’t even lend to each other, much less to builder customers. Meanwhile, builders and their buyers are in deep need of counseling; they have never had more deep-seated psychological problems. With home prices falling, surveys show that most buyers don’t think this is a good time to buy a home. Like spectators at an airshow, they would rather sit in the stands watching prices plummet, (See page 174) 172 ■ B U I LD E R ja n ua ry 2 0 0 9 W W W.BUILDERONLINE.COM http://WWW.BUILDERONLINE.COM
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