So is it a good time to buy a larger shop or just add on to an existing
one?

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Is Housing Out of the Woods?
A growing chorus of experts says the worst may be over for home sales.
But the recovery may not be smooth-or quick


Depending on whom you ask, the winds may already be shifting for the
housing market. All year, economists have warned of a bursting housing
bubble and its potential impact on economic growth (see
BusinessWeek.com, 8/21/06, "Why Housing Looks a Little Rickety").
However, a recent stream of encouraging data has some prominent
prognosticators changing their tune.

One of the first in line was Alan Greenspan. As recently as May 18, the
former Federal Reserve chairman put an exclamation point on the housing
slowdown when he declared, "The boom is over." But now, the "worst may
well be over," Greenspan was quoted as saying Oct. 7, after mortgage
applications posted their biggest weekly gain since June, 2005.

A growing number of economists and analysts have come around to the
ex-Fed chief's view. Some investors may see sunnier skies too, as
homebuilding stocks such as Lennar (LEN), DR Horton (DHI), and Pulte
Homes (PHM) have rebounded since touching 52-week lows in July. Reports
on existing home sales for September, scheduled for release Oct. 25,
and new home sales Oct. 26 could shed more light on housing's status.

Leveling Out? While the most bearish scenarios may be becoming
increasingly unlikely, the housing market probably isn't out of the
woods yet. Even the most upbeat forecasts call for new-home
construction to keep declining nearly as much as it already has so far.
Meanwhile, underlying economic figures may contradict their milder
headlines.

Greenspan's assessment followed on the heels of Fed Vice-Chairman
Donald Kohn's suggestion Oct. 4 that "[housing] starts may be closer to
their trough than to their peak." The data since then could give bulls
even more reason for guarded optimism. On Oct. 17, the National
Association of Home Builders' housing-market index rebounded to 31 from
30 in September, snapping a 12-month decline from 68 a year earlier. A
day later, a Commerce Dept. report showed housing starts rose 5.9% in
September, to an unexpectedly strong pace of 1.772 million units.

"The point of maximum deterioration in housing activity has probably
passed," says Jan Hatzius, chief U.S. economist at Goldman Sachs (GS),
in an Oct. 20 report. "The sharp downturn of the past year seems to
have brought total housing starts-single-family starts, multi-family
starts, and mobile-home shipments-close to the level justified by the
underlying demographics."

Permit Plunge Still, Hatzius comes up with plenty of caveats. Housing
activity could drop by another 300,000 housing starts, he projects, as
homebuilders work off unwanted inventory and buyers shift from
single-family units to multifamily and mobile homes. That would come on
top of a decline of 400,000 housing starts already, Hatzius says.

Others maintain that the housing downturn still has a long way to go.
"Commentary suggesting housing demand is recovering, based on the
latest homebuilder and mortgage applications readings, appears to be
more wishful thinking than fact," says Keith Hembre, chief economist at
First American Funds, in an Oct. 20 report. Housing may have stabilized
somewhat, but it's probably only temporary, according to David
Rosenberg, North American economist at Merrill Lynch (MER). The
unexpected September surge in housing starts came alongside a 6.3% drop
in building permits to their slowest pace since October, 2001 (see
BusinessWeek.com, 9/18/06, "The Housing Bust: Sorry, It Ain't Over
Yet"). A decline in building permits has accompanied a rise in housing
starts only six times since 2003, according to Rosenberg, and starts
fell a month later on five of those occasions.

Grim Futures Rosenberg also differs with Goldman's Hatzius over
demographics. "Our research suggests that this housing cycle does not
bottom out until starts reach the 1.3 million mark," Rosenberg said in
an Oct. 19 report. "So contrary to popular opinion, we are barely in
the fifth inning of this down-cycle on the construction front."

So far, futures traders are sticking with the pessimistic view (see
BusinessWeek.com, 10/10/06, "Where Housing Prices Will Fall the Most").
In afternoon trading Oct. 23, investors were predicting declines over
the next 12 months in all 10 markets covered by the Chicago Mercantile
Exchange's housing contracts. The composite index is seen falling 7% by
August, 2007, when the one-year contract expires. That's roughly
unchanged from what investors expected a month earlier.

Other derivatives traders may also be betting on a deeper slump for
housing. On Oct. 11, the lowest-rated subset of the ABX home-equity
index touched its weakest price level since it was launched in January,
according to London-based Markit, which created the index with CDS
IndexCo. The index tracks a basket of credit default swaps on subprime
mortgages and home-equity loans.

Circumspect Bears In an Oct. 9 speech, San Francisco Fed President
Janet Yellen painted a possibly even gloomier picture. Yellen spoke of
a major homebuilder who calls Phoenix and Las Vegas "the new 'ghost
towns' of the West." According to Yellen, price cuts "appear
inevitable."

Still, there are some glimmers of hope for housing demand. Peter
Kretzmer, a senior economist at Bank of America (BAC), points to the
University of Michigan's latest consumer-sentiment report, in which the
share of respondents indicating that it was a good time to buy a house
jumped to its highest level in 14 months.

Meanwhile, some economists are becoming more circumspect in their
bearishness. In an Oct. 20 note, Richard Berner, chief U.S. economist
at Morgan Stanley (MS), says he still believes the housing slowdown is
far from over. "Nonetheless, the latest data suggest that the intensity
of the housing decline may be fading somewhat, and with it some of the
concurrent downward pressure on housing prices," he adds. "If so, one
of the biggest perceived risks to the U.S. economy may be smaller than
feared."

After years of defying naysayers' predictions, the housing market has
finally cooled in recent months, by virtually all accounts. However,
the debate over when the current slowdown will end may be just
beginning.