Following an unsustainable boom in housing starts, sales and price appreciation in 2004 and 2005, NAHB Chief Economist David Seiders said that “we need a period of below-trend performance to work off excess inventory and improve housing affordability.”

He is predicting an 11.5 percent decline in housing starts in 2006, followed by an 11.7 percent decline in 2007. Housing should hit bottom by the middle of this year.

Noting that housing is now a major source of weakness for the economy, Nariman Behravesh, chief economist for Global Insight, said that the “good news is that other sectors are doing reasonably well and will continue” to do so. Corporate cash flow is at record levels and will be used to invest in equipment and infrastructure to create new jobs.

“To bring the markets back to equilibrium, we need sluggish growth in prices for three, four, five years,” he noted.

Strong global economies, record levels of U.S. corporate profits, a healthy stock market, unraveling energy prices and falling interest rates are among the “safety nets” for housing during this adjustment period, said JPMorgan Chase Managing Director Jim Glassman.

New home sales are “right in line with where we were in 2003, which was then a record year for housing,” noted Mike Moran, chief economist for Daiwa Securities America. “And we have squeezed out the exuberance that was in place in 2004 and 2005.”

Single-family housing starts are slowing more sharply than new home sales, another indication that the industry will adjust fairly quickly, he said.