Thursday, August 30, 2007

Comments on Goldman Sachs Housing Forecast

by Bill McBride on 8/30/2007 12:12:00 PM

Last night, I posted the current Goldman Sachs housing forecast.

A frequently asked question is why starts are forecast to be higher than new home sales. New Home sales come from a subset of housing starts. Housing starts also include owner built units, rental apartments, and other units that would still not be included, if sold, in the New Home sales report.

The new home sales estimate reported by the Census Bureau includes only new single-family residential structures that include both the structure and the land. The Census Bureau defines single-family homes as either fully detached structures or certain attached homes with an unbroken ground-to-roof separating wall. This definition includes some condominiums (side by side units), but does not include condominium units with another unit above or below. Starts for large multi-story condominium projects are included in the housing starts report, but sales and inventory are not included in the New Home sales report.

Just remember that new home sales come from a subset of housing starts. Working through the numbers, the Goldman Sachs forecast for starts to fall to 1.1 million units SAAR, and new home sales to fall to 0.650 million units SAAR is logically consistent, and consistent with historical data.

The following two graphs show the Goldman Sachs forecast for residential investment (RI) and new home sales.

Goldman Sachs Residential Investment ForecastClick on graph for larger image.

The GS forecast is given as a percent change in RI. This graph converts that forecast into RI as a percent of GDP (with some added assumptions about GDP).

The GS forecast is for another significant downturn in residential investment, and their forecast takes RI as a percent of GDP close to or below 4%, similar to previous housing downturns. GS is currently forecasting RI to bottom in Q4 '08. This is similar to my current view.

NOTE: Please don't confuse a bottom in RI, with a bottom in housing prices. During previous housing busts, existing home prices continued to fall long after residential investment bottomed.

Goldman Sachs New Home Sales ForecastThe second graph shows Goldman Sachs' new home sales forecast through 2008. GS shows sales bottoming at 650K in Q1 and Q2 2008, with a very modest increase towards the end of '08.

No wonder the home builders will be meeting with Bernanke next week. See: Hovnanian CEO says risk of recession heightened. If these forecasts are accurate, these two graphs spell doom for some home builders.

To see the Goldman Sachs forecasts for prices and existing home sales, see table at bottom of Goldman Sachs Housing Forecast.