Eye on the Economy: Housing Downswing Approaching a Bottom
The U.S. economy is being whipsawed by a wide range of influences at home and abroad. These influences include wild fluctuations in energy prices, extreme volatility in national and global financial markets, a deepening housing contraction and important charges to economic policy.
The government now says that growth of real gross domestic product (GDP) actually dipped slightly into the negative zone late last year, bolstering the case for a recession “call” by the Business Cycle Dating Committee at the National Bureau of Economic Research (NBER).
On the other hand, GDP regained some footing during the first half of this year, particularly in the second quarter.
The second-quarter pickup was due largely to support for consumer spending provided by rebates of personal income taxes under the Fiscal Stimulus Act of 2008. The trade sector also contributed mightily to second-quarter growth and federal defense spending provided solid support as well.
These positives easily outweighed another sizable hit from housing as well as a major cutback in business inventory investment, leaving the “advance” estimate of annualized growth in real GDP at 1.9%.
The Threat of Major Economic Reversal Still Lies in Front of Us
The economic roadway promises to be even rougher in the second half of the year. For one thing, support to consumer spending from the income tax rebates will lose some strength in the third quarter and actually will convert to a negative “payback” effect late this year and in the early part of 2009. The incentives for business investment contained in the Fiscal Stimulus Act most likely will provide only minor support to the economy late this year.
Ongoing deterioration of the labor market inevitably will weigh on both consumer and business spending as we move ahead, as will near-record energy costs.
The drag from housing may very well ease off later this year, although significant positive GDP growth contributions from this sector are not likely before the second half of 2009.
NAHB’s baseline (most probable) forecast shows a pronounced slowing of GDP growth during the second half of this year, with a virtual stall in the fourth quarter, followed by a gradual recovery pattern during 2009.
This pattern, if achieved, presumably would not provoke an official recession “call” at the NBER. But it must also be stressed that our current baseline forecast is subject to substantial downside risk.
The Labor Market Is Weakening on Cue
The subpar pattern of GDP growth since the third quarter of last year, along with ongoing growth in labor productivity (output per hour), have produced systematic losses of payroll employment and increases in the unemployment rate.
The weakening process has not yet reached typical recession proportions, but there’s certainly more to come.
Non-farm payroll employment has been falling since the end of last year, and the cumulative decline (through July) comes to 463,000 ― an average monthly loss of 66,000 jobs. The civilian unemployment rate hit 5.7% in July, up by a full percentage point over the past year and the highest since March 2004.
Broader measures of labor “underutilization,” including so-called discouraged workers and those limited to part-time work for economic reasons, look even more serious. Indeed, the U.S. Department of Labor’s broadest measure of underutilization (U-6) shows an increase of two percentage points over the past year to the highest level since September 2003.
NAHB’s forecast shows continuation of moderate declines in payroll employment though the first quarter of 2009, and we expect the unemployment rate to top out at 6.1% in the second quarter of next year.
Generation of slack in labor markets is a positive factor on the inflation front, of course, holding down growth of labor compensation and putting a lid on unit labor costs — good news for the Fed.
The Fed Holds Steady and Worries Less About Inflation
The Fed held short-term interest rates steady at the Aug. 5 meeting of the Federal Open Market Committee (FOMC), maintaining a 2% federal funds rate target and a 2.25% discount rate.
This decision came on the heels of a July 30 announcement that extended the terms and conditions for the special liquidity facilities that the Fed had introduced earlier in response to severe inter-bank and investment bank funding pressures.
The Fed has also made the discount window available to Fannie Mae and Freddie Mac, as part of a Fed-Treasury effort to restore market confidence in these government sponsored enterprises.
The Aug. 5 FOMC statement noted that tight credit conditions, ongoing housing contraction and elevated energy prices “are likely to weigh on economic growth over the next few quarters.” The statement also noted that “inflation has been high…and some indicators of inflation expectations have been elevated.”
But unlike the rather hawkish June 25 FOMC statement, the Aug. 5 statement suggested that the Fed views downside risks to growth and upside risks to inflation to be about in balance. This judgment was shared by 10 voting members of the FOMC, with only one member dissenting and voting in favor of a rate increase.
The Fed expects a near-term slowdown in real economic growth and a slowdown in inflation at the same time (similar to NAHB’s forecast). In that environment, the Fed presumably will maintain a stimulative monetary policy stance that keeps the “real” federal funds rate in the negative zone for some time.
NAHB’s forecast assumes the Fed will keep the nominal funds rate at 2% until the second quarter of 2009, followed by a series of increases that will move monetary policy back toward a neutral position.
The Housing Downswing Is Still ‘Ongoing’
Recent housing market data support the Fed’s judgment that the stunning housing downswing extended through the middle of the year, at least on a national average basis, and that there’s still downward momentum in the housing market.
Sales of new and existing homes continued to lose ground in June and house prices continued to fall in many areas of the country. The inventory of homes on the market remained quite high at mid-year, particularly on a months’ supply basis, and the supplies of vacant units for-sale and for-rent remained close to record levels.
Faced with daunting imbalances between housing demand and supply, builders continued to cut housing starts and issuance of building permits in June, particularly in the single-family sector. Furthermore, NAHB’s single-family Housing Market Index hit a record low in July as builders’ assessments of current sales, buyer traffic and future sales all continued to decline.
New Housing Bill Will Help Stem the Housing Contraction
The Housing and Economic Recovery Act of 2008, signed into law by the President on July 30, contains a broad range of measures designed to help stabilize the housing and mortgage markets in the short term and to provide longer-term support as well.
The most important short-term measures address the serious supply-demand imbalance in housing markets and strengthen the government-related sources of credit that now dominate the home mortgage markets.
To help stimulate home buying in the short term, the bill provides a temporary $7,500 refundable tax credit for first-time home buyers ― details can be found at www.federalhousingtaxcredit.com.
To help stem the flow of homes onto the for-sale market, the bill contains a temporary “Hope for Homeowners” program that engages the Federal Housing Administration (FHA) to enable strapped home owners with underwater mortgages to avoid foreclosure. Furthermore, state housing finance agencies are given temporary authority to utilize an expanded volume of mortgage revenue bond proceeds to refinance subprime ARMs that are generating serious payment shock.
The bill provides support to home mortgage markets primarily by enhancing Treasury support to the embattled secondary-market GSEs on a temporary basis and by increasing loan-size limits for both the GSEs and FHA/VA on a permanent basis.
It’s noteworthy that the bill eliminated use of seller-funded downpayment assistance for home purchases financed by FHA-insured mortgages and also increased the minimum downpayment required on FHA mortgages from 3.0% to 3.5%.
These “negatives” for housing were enacted as part of an elaborate series of compromises and tradeoffs in the policy-making process.
The net short-term effects of the new housing bill on housing and mortgage markets promise to be significantly positive.
The provision of greatly expanded Treasury support to the GSEs, along with GSE assess to the Federal Reserve discount window, has quelled a budding financial market crisis and should compress the spreads between conventional conforming mortgage rates and yields on comparable-maturity Treasury securities ― federal backing went from implicit to explicit.
The permanently higher size limits for loans purchased by the GSEs or insured/guaranteed by FHA/VA are big positives in mortgage markets that still are preoccupied with credit quality issues.
The combination of the temporary tax credit for first-time home buyers and the “Hope for Homeowners” foreclosure prevention program is bound to reduce the supply-demand imbalance in the housing market and help stem the decline in house prices (everything else equal), and this process will be facilitated by the enhancements to the government-related components of the home mortgage market.
The Housing Downswing Is Approaching a Bottom
The current housing contraction already qualifies as the most serious of the post-World War II period, and there’s still downward momentum in many markets across the country.
But the combination of income growth and house price declines has revived housing affordability, and growing proportions of consumers describe home buying conditions as “good.”
It appears that large numbers of Americans now are seriously considering home purchases and we expect the temporary tax credit for first-time buyers to energize home sales over the balance of this year and the first half of 2009.
We expect sales of new and existing homes to bottom out in the current quarter and embark on a gradual recovery process beyond that point. The inventory overhang most likely will stretch out the declines in housing starts and permit issuance into the early part of 2009, and we do not expect the housing production component of GDP (residential fixed investment) to turn up before the second half of next year.
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 Aug. 6 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
What was once expected to be a relatively mild housing slump following three years of record new home construction and sales has given way to a significant downturn.
To help members navigate the uncharted waters of this slowdown, NAHB has compiled a comprehensive “Back to Basics” online toolkit — the best of the basics, the tried and true and the truly new. To access the toolkit, click here.
To access the “Back to Basics” toolkit, you must be an NAHB member and have a login to www.nahb.org. To create a login, go to www.nahb.org/login or click on the log-in button on the main menu bar.
For assistance, call the NAHB Member Service Center at 800-368-5242.