The Fed holds short-term rates steady, downgrades labor market and pricing problems …
As widely expected, the Fed maintained its 1% federal funds rate target at the Dec. 9 Federal Open Market Committee (FOMC) meeting. At the same time, the Fed upgraded its assessment of the labor market since the Oct. 28 meeting — from “appears to be stabilizing” to “appears to be improving modestly.” The Fed also downgraded its deflation concern by saying: “The probability of an unwelcome fall in inflation has diminished in recent months and now appears almost equal to that of a rise in inflation.” However, the Fed went on to repeat that the present (highly stimulative) policy stance can be maintained “for a considerable period,” since the inflation level still is quite low and there’s still a lot of slack in resource (labor and capital) markets.
A “considerable period” of stable monetary policy still means quite some time …
It now appears that the Fed’s more positive readings on the labor market and the inflation situation may have been premature. Not only did key measures of core inflation deteriorate in November (in data released after the FOMC meeting), but the November employment report (released on Dec. 6) was weaker than expected.
These market developments served to put a lid on long-term interest rates and quelled any concerns about Fed tightening in the near future. NAHB’s forecast still assumes that the first rate hike will occur at the FOMC meeting right after the November 2004 elections (at the earliest) and that long-term rates will gravitate upward by less than a percentage point over the course of 2004. Indeed, we expect the long-term home mortgage rate to be only about 6.5% this time next year, up from 5.9% currently.
The housing market storms its way toward year end …
The single-family housing market has been showing great strength recently and the condo market is providing good support to the multifamily market. Sales of new homes are bound to exceed a million units in 2003 for the first time in history, and single-family housing starts (including homes built on owners’ lots) will easily set a new record (around 1.5 million units). Multifamily starts essentially held their own in 2003 (around 340,000 units), despite very high vacancies in market-rate rental housing as the condo and subsidized rental housing components performed relatively well. NAHB now estimates that total housing starts will hit 1.84 million units for the year — the highest since 1978.
The housing outlook for 2004 has been upgraded as well …
The key drivers of the housing sector in 2003 still are pumping hard, and sales and production will have strong momentum moving into the New Year. There are some legitimate issues regarding sustainability of the exuberant fourth-quarter performance (an annualized pace of housing starts around 2 million units), but there’s little reason to expect 2004 to be way below the average pace of 2003. We’re currently expecting total housing starts to be down by 3%-4% on a year-over-year basis.
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 Dec. 17 edition. To subcribe to “Eye on the Economy,” click here.
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