12/20/05: One On One With with Fannie Mae Chief Economist David Berson
SUSIE GHARIB: As you mentioned earlier, the housing market has logged another blowout month, with November housing starts up 5.3 percent, far beyond what Wall Street had expected. To find out why, Washington bureau chief Darren Gersh spoke with Fannie Mae chief economist David Berson. He began by asking Berson why this number caught analysts by surprise.
DAVID BERSON, CHIEF ECONOMIST, FANNIE MAE: I think that builders are responding to the very strong pace of home sales that we saw in October. Single-family sales were at a record pace in October. I think that`s the main part of the strength that we saw today with the housing starts numbers. It`s probably not sustainable, though.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: Your forecast is that the market has peaked. What does that mean, you just put out your forecast for 2006?
BERSON: That`s right. We think that home sales will fall in 2006. 2005 can be the fifth consecutive record year for home sales. We`ve never seen that before. But we think in 2006 we`ll have a modest fall-off, somewhere between five and 10 percent in home sales. That would still leave home sales in 2006 at the third highest level ever.
GERSH: Why the fall-out, because you`ve got interest rates basically unchanged. I mean you still see interest rates around 6 1/4. So why the fallout?
BERSON: We think rates will move up a little bit, but that`s not the main reason. We think that sales will fall in 2006, because one of the components of the strength that we`ve seen -- particularly in the last two years -- has been investors. Investors have come into the housing market in large quantities, perhaps record quantities. Investor demand is more volatile than other housing demand. So investors go in and out of markets more easily than other buyers of homes. They`ve been very big into markets and the housing markets in the last two years. We`re already starting to see some very early signs, we think, of investors starting to pull out of markets and that leads us to our view that housing demand will fall next year.
GERSH: But if investors as you say jump in and out of the housing market, why wouldn`t that seem to indicate that maybe the market will not just sort of gradually decline but crash like some people are saying?
BERSON: The main part of housing demand is not coming from investors. Housing demand comes fundamentally from job and income growth and demographics and not from investors. Now the investors have been the icing on the cake of the housing market in the last year. The icing is coming off, but the cake remains.
GERSH: we could have a good national housing market and see individual cities really crash.
BERSON: We will almost certainly see significant regional variation, as we almost always do. Cities that have had a very high investor share may be at more risk, if the investors do pull out, particularly those areas that have not had --
GERSH: Name names.
BERSON: Particularly areas that have not had strong job growth to help offset the investors. For example, everybody likes to look at Las Vegas, the poster child of investor buying. And indeed, Las Vegas has seen lots of investors but Las Vegas also has the strongest job growth in the country, also has very strong in migration people who move there and buy homes. So could Las Vegas see a signature slowdown? Yes, if investors pull out, but because people continue to move there, it`s probably not going to crash.
GERSH: What`s your outlook for prices?
BERSON: We think home price gains are going to slow meaningfully. They have been rising at double digit rates in the last couple years in part fueled by this boom in investors. So for 2004 and 2005, home price gains on average have been anywhere from 10 to 12 percent. That`s not sustainable. We think that a sustainable rate is somewhere around 4 percent. That`s about income growth. But we think for a year or two, we may see home price gains somewhat below that and that`s what we normally see. When we see a period where home price grains are well above normal, we then see a following period where home price gains, while still positive are less than normal. So in 2006, nationally, we`ll probably see home prices going up at about a 3 to 3.5 percent rate.
GERSH: What about the condo market? I hear a lot of people speculating that the condo market has turned even harder than the housing market.
BERSON: Well, the condo market we think has been the investment of choice for the housing investors and it makes sense. It`s a much easier investment. You don`t have to mow the lawn, for example, you simply have the unit. If investors have been more concentrated in condominiums than in single-family units, then we`re more likely to see a fall-off, a bigger fall-off in condominium sales in 2006 than single-family sales, if the investors do pull out. And that means that there`s likely to be more weakness in condo prices than single-family home prices next year as well.
GERSH: David Berson, chief economist for Fannie Mae, thanks a lot.
BERSON: Good to be here.