Eye on the Economy: Housing Policy Support Should Arrive Soon
Annualized growth of real gross domestic product (GDP) has been running well below trend since late last year, not in typical recession territory but slow enough to result in systematic deterioration of the labor market. This pattern will qualify as an unofficial “growth recession” if it persists for much longer.
First-quarter GDP growth stands at 1.0%, according to the “final” estimate released from the Commerce Department, and we’re estimating a similar performance in the second quarter of this year.
The economy lost 324,000 payroll jobs in the first five months of the year, and the unemployment rate rose by 0.5% during that period.
The employment report for June, to be released on July 3, should show a further decline in payroll employment, although the unemployment rate could edge downward — following a seasonal quirk in May.
Maintenance of positive GDP growth in recent quarters actually is remarkable, in view of the strong headwinds that are buffeting the U.S. economy. These include the deepening housing contraction, the unprecedented turmoil in national and global credit markets and the virtual explosion of global oil prices since late last year — a combination of factors commonly dubbed the “troublesome trio.”
The economy will continue to face formidable difficulties as the year proceeds, although both monetary and fiscal policy most likely will be providing crucial support to the system.
The Consumer Is Being Pulled in All Directions at Once
Consumer spending accounts for more than 70% of GDP, so a serious shortfall in personal consumption expenditures (PCE) inevitably spells big trouble for the U.S. economy.
Growth of real PCE slowed to an anemic 1.1% annual rate in the first quarter, and spending on consumer durables contracted at a 6.0% rate. Furthermore, real PCE was dead flat in April, as slow growth in spending on services barely offset contractions in both the durable and nondurable goods categories. This is hardly good news for the U.S. economy.
Rebates of personal income taxes, authorized by the Fiscal Stimulus Act of 2008, come to $116 billion, an amount that could stimulate solid growth in PCE in short order. The rebates started to go out at the end of April, about $50 billion were dispersed in May, and the rest should be received by taxpayers by the end of July.
It appears that the tax rebates are “working” reasonably well. Retail sales strengthened considerably in May, even after accounting for surging gasoline prices, and we expect positive support to be maintained for at least a few more months.
On the negative side, measures of consumer confidence/sentiment have slipped into recession-like territory, pushed down by growing concerns about the weakening job market, surging energy costs, falling house prices and a retreating stock market.
There’s a real tug-of-war going on here, and it remains to be seen how well consumer spending will hold up over the balance of the year. We expect maintenance of modest growth in real PCE, but that’s hardly a slam-dunk.
The Fed Maintains a Stimulative Policy Stance
The Federal Reserve held monetary policy steady at the June 24-25 meeting of the Federal Open Market Committee (FOMC), keeping the federal funds rate target at 2.0% and the discount rate at 2.25%. Thus the real (inflation-adjusted) funds rate remains in the negative zone, clearly a stimulative monetary policy stance.
The June 25 FOMC statement expressed a good bit of concern about the near-term prospects for economic growth, citing “tight credit conditions, the ongoing housing contraction, and the rise in energy prices.” But the statement definitely upgraded inflation concerns, stating that “upside risks to inflation and inflation expectations have increased.”
It’s fair to say that the Fed’s view of the balance of risk to the U.S. economy has shifted toward the inflation side, but the FOMC statement still was technically neutral — consistent with a stable policy stance for now.
We continue to believe that the Fed will hold steady over the balance of this year and into the beginning of 2009, as long as inflation moderates as expected and inflation expectations in the private sector do not rise substantially.
Mixed Pattern of Home Sales Is Not a Reassuring Sign for the Economy
Sales of new homes fell by 2.5% in May, continuing the irregular but persistent slide that began in the fall of 2005, while sales of existing (previously owned) homes rose by 2.0% in May. In fact, existing-home sales have been in a narrow range all year, while new-home sales have been trailing downward systematically.
It’s clear that the relatively strong performance of existing-home sales in recent times reflects rising sales of foreclosed homes that get into the multiple listing service. While it’s good that foreclosed homes are selling ― generally at fire-sale prices ― rising foreclosures are hardly a sign of vitality in the nation’s housing market.
Indeed, rising foreclosures dump more inventory onto the market, making it even harder for builders to sell new homes in inventory.
The key to a meaningful turnaround in the housing market is recovery in net sales of new homes (new orders less cancellations) to levels that systematically exceed starts of new homes for sale (excluding homes built on owners’ lots).
Such a pattern will systematically reduce inventories of new homes on the ground (under construction or completed) and pave the way for recovery in production of new housing units — the key to restoring housing as a positive factor in economic growth.
NAHB’s proprietary survey of large single-family builders, accounting for about one-fourth of all for-sale homes built in the U.S., has yet to show meaningful stabilization of seasonally adjusted net home sales, as reported through May. Gross sales continue to trend downward, and cancellation rates measured relative to gross sales or sales backlog still are at historically high levels.
NAHB’s broad-based Housing Market Index, based on monthly surveys of roughly 400 single-family builders, show no improvement in builders’ perceptions of the demand side of the market.
Indeed, the HMI fell back to 18 in June, returning to the record low posted in December of last year. All three components of the HMI — current sales, sales expectations and buyer traffic — were at or near record lows, and all four regions of the country had depressed HMI readings.
Housing Production Still Is Falling
The ongoing deterioration in net sales of new homes, the record numbers of vacant homes for sale including foreclosed homes, and large declines in home prices in many areas naturally continue to put strong downward pressure on the production of new housing.
Residential fixed investment (RFI) contracted at a 25% annual rate in the “final” estimate of GDP for the first quarter, lopping off nearly 1.2 percentage points from the overall GDP growth rate. Single-family starts and permits fell a good bit further during the April-May period, locking in another major decline in RFI for the second quarter of at least 20%.
Absent much-needed policy support, home sales will remain quite weak for some time and RFI will decline over the balance of this year and into 2009.
We’re currently projecting a 21% decline in RFI for 2008 year-over-year and a further 3.3% decline in 2009. That’s a lot for the U.S. economy to handle, particularly when energy costs are creating strong headwinds and the financial system is in a state of disrepair.
Policy Support Should Arrive Soon
The Congress and the Administration have come to appreciate the seriousness of the downswing in housing production, the downswing in house prices and the associated upswing in foreclosures. Both the House and the Senate have been working hard on housing stimulus legislation, and opposition from the White House with respect to some provisions appears to be softening.
It’s unlikely that Congress will send a bill to the President before the July 4th recess, but chances for enactment later in July look pretty good, subject to the vagaries of congressional behavior.
A temporary $8,000 tax credit for first-time home buyers could very well jump-start home sales and help to stabilize both house prices and mortgage credit quality. Other key provisions should provide relief on the mortgage foreclosure front and strengthen key components of the mortgage finance system — FHA and the government sponsored enterprises (Fannie Mae, Freddie Mac and the Federal Home Loan Bank System).
We’re now working out appropriate forecast adjustments to accompany enactment of a housing stimulus package. Stay tuned.
NAHB Chief Economist David Seiders analyzes the economy from the point of view of the housing market every other week in the free e-newsletter, “Eye on the Economy.” The preceding is a reissue of his June 25 edition. To subscribe to “Eye on the Economy,” click here.
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Free NAHB Kit Gives Builders Back-to-Basics Tips to Navigate the Slowdown
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