A new report released by the National Association of Home Builders suggests that housing markets with the biggest booms in 2004 and 2005 will be the slowest to recover to normal levels of sales activity while those areas that were more restrained, with the exception of the hard-hit Midwest, will come back sooner.

According the National Association of Home Builders' (NAHB) Regional Housing Starts Forecast, available through the NAHB's HousingEconomics.com, suggests that 2007 is expected to be a year of transition, with growth emerging in many areas.

"The earlier boom in housing can be attributed largely to excess demand generated by historically low interest rates coupled with aggressive mortgage lending practices, a combination that made homeownership more affordable but also attracted investors and speculators into many markets," says the report. "These factors put inordinate upward pressure on sales, prices and production. Major downward corrections occurred in housing markets during 2006 and further adjustments have extended into the early part of 2007."

"Because the boom and correction cycle has largely been driven by national rather than local factors, most regions have experienced some degree of over-heating and correction," said NAHB Chief Economist David Seiders. "We expect 2007 to be a time of transition in most regions, with housing starts bottoming out in the early part of the year before transitioning to gradual recovery paths."

For 2007, the NAHB forecasts new single-family home production at 1.2 million units, 30.2 percent down from the all-time high of 1.72 units in 2005. But things will pick up in 2008, when single-family home production will hit 1.31 million units, down 23.8 percent from 2005.

The optimism is due to two factors: inventory overhang will largely be absorbed and areas that weren't overbuilt during the boom will recover from national influences to normal levels of production, says the trade organization.

Using the five-year benchmark of 1999-2003 as a "normal" market for comparison to the peak years of 2004 and 2005, the NAHB found that "two-thirds of the 100 large metropolitan areas produced more than 115 percent of this benchmark in 2005, while one-half produced at least 120 percent of this pre-boom demand."

The South peaked at 145 percent of pre-boom demand before dropping back to normal levels in 2006. The West peaked to 143 percent of pre-boom demand. The Northeast rose to 127 percent of pre-boom demand before dropping to 90 percent levels, or below normal demand. Faring worst was the Midwest, rising 116 percent of pre-boom demand before sinking to 68 percent of normal demand.

Half of the 100 largest metropolitan areas were down in housing production by 15 to 40 percent of third quarter highs in 2005. Some markets were down 50 percent or more.

Among the report's highlights:

South Atlantic Division: Atlanta accounts for two-thirds of housing starts in Georgia, and six major cities in North Carolina including Asheville, Charlotte, Durham, Greensboro, Raleigh and Winston-Salem. At preboom levels last year, the area is expected to return to positive growth.

In contrast, Florida is expected to be among the weakest areas for new building. Cities such as Cape Cora/Ft. Myers reached 337 percent of "normal" in 2005 and 150 percent of normal for Orlando.

In North Carolina, building declines are predicted for Charleston (up 178 percent of normal,) and Myrtle Beach (up 264 percent of normal.)

West South Central Division: Texas accounts for roughly 75 percent of construction in this region, which reported the strongest growth during the boom and has maintained the highest level of production through the correction. The division also includes the New Orleans metro area which has seen its pace of housing starts emerge from its 2005 collapse to rival pre-Katrina levels.

East South Central Division: The East South Central division -- comprised of Alabama, Kentucky, Mississippi and Tennessee -- was the only area other than the West South Central division to have housing production levels at the end of 2006 above pre-boom levels. Mountain Division: The Phoenix metro area rose to 149 percent of pre-boom demand in 2005 before dropping to 79 percent by the end of 2006, making it one of the most volatile markets in the nation. Las Vegas performed similarly with prices rising rapidly, primarily due to investor demand. NAHB forecasts that due to the steep corrections, these areas will grow moderately this year and next as they cope with the prices, production and investor excesses that swamped them.

Pacific Division: The boom in California, which accounts for 70 percent of the starts in the division, had something to do with investors but more to do with demand for affordable housing in the state. The report notes that major markets such as Los Angeles, San Diego and San Francisco are expected to experience strong gains in 2007 based on deceleration in prices and the absence of over-production during the boom and the depth of their slowdowns in 2006. Those gains will slow in 2008, predicts the NAHB.

Northeast Region: The Northeast has experienced a fairly restrained housing cycle. Major metro areas such as Boston and New York had production levels that looked more like recovery from a slowdown earlier in the decade rather than an over-stimulated boom. Due to the fundamental health of the underlying economies, a quick recovery and a return to more normal levels of production is expected in these markets.

Midwest Region: The Midwest region suffered the most in this housing cycle with the lowest peak during the boom and deepest the trough during the correction, due largely to weakened economies in the region's industrial cities like Detroit and Kansas City.

Published: March 22, 2007

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