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Eye on the Economy: Housing Downswing Still Is Underway
 The economy still is moving ahead at a decent pace without generating prohibitive inflationary pressures. Growth of real gross domestic product (GDP) has been revised upward for the second quarter, although the pace still qualifies as slightly below trend and the composition of second-quarter GDP has sobering implications for the third quarter of the year.
Indeed, slightly below-trend rates of economic growth are in store for the balance of this year and most of 2007, although trend-like growth should be attained by 2008 (our short-term forecast now extends through 2008).
Payroll employment growth has shifted to a lower pace as growth of economic output has slowed, and the unemployment rate is off its cyclical low in the second quarter of this year. Job growth should continue around recent rates for some time and the unemployment rate should move up somewhat further before receding over the latter part of our forecast horizon.
Core inflation still is running above the upper bounds of the Federal Reserve’s implicit comfort zones. However, recent news is reassuring and the core inflation measures still are being boosted by the perverse “owners’ equivalent rent” imputations that should be discounted by the Fed.
The Interest-Rate Picture Has Brightened Recently
Economic developments since the Aug. 8 meeting of the Federal Open Market Committee (FOMC) meeting — particularly further deterioration of housing market activity and reassuring news on core inflation ― point toward another “no change” decision at the next FOMC meeting on Sept. 20. We’re still expecting stable monetary policy through mid-2007, followed by a bit of monetary ease to help the economy move up toward trend.
Fixed-income markets have feasted on the news of a slowing economy, limited core inflation pressures and rising prospects for stable short-term interest rates. Long-term bond and mortgage rates have come down quite a bit from their mid-year highs, and we’re expecting only slight increases in coming quarters.
Additional Declines Ahead in Starts and Sales
The housing downswing that began around the middle of last year deepened in July as all major housing indicators lost more ground. Furthermore, forward-looking surveys of builders and mortgage lenders, including NAHB’s monthly survey of single-family builders and weekly surveys of home mortgage lenders conducted by the Mortgage Bankers Association, point toward additional declines in single-family sales and housing starts in August.
Large inventory overhangs of both new and existing units promise to weigh on both single-family and condo markets for some time.
House prices now are reflecting the falloff in housing demand and the buildup of unsold inventories. The purchase-only component of the House Price Index produced by the Office of Federal Housing Enterprise Oversight (OFHEO) rose by only 1% in the second quarter (seasonally adjusted), less than half the pace in 2005, and a fair number of metro areas now are showing quarter-to-quarter declines in the OFHEO “repeat transactions” data system.
For July, the median price of new homes sold was up by only 0.3% on a year-over-year basis, the median price of existing single-family homes was up by only 1.5% and the median price of existing condo units actually was down by 1% on a year-over-year basis.
All these national data show dramatic deceleration from the double-digit rates of price appreciation recorded in previous years, and prices now are falling in a growing number of metro areas.
Housing Market Activity Should Stabilize by Mid-2007
It’s clear that the housing downswing still has some distance to go, if only to work off excess supply in markets for both new and existing homes.
Builders are doing their part by cutting back on starts of new units, by trimming prices and by offering sizeable non-price sales incentives to limit cancellations and bolster sales. Furthermore, various economic and financial market fundamentals figure to be supportive of housing demand for the foreseeable future, helping to facilitate the inventory correction.
As long as the economy remains in good shape, interest rates remain close to current levels, energy prices remain below recent highs and sellers of new and existing homes adjust prices or offer incentives to meet current market realities, the rest of the housing market correction should be of limited depth and duration.
It’s likely that the bulk of the downswing in home sales and housing production will occur this year, with market activity stabilizing during 2007 and moving back up toward trend in 2008. The cumulative below-trend levels of housing market activity we’re projecting roughly offset the above-trend performances in 2004-2005.
The Housing Market Downswing Won’t Pull the U.S. Economy into Recession
The downswing in housing market activity will continue to detract from economic growth over the balance of this year and in the first half of 2007. However, stronger performances from other sectors, including non-residential construction, should keep the overall economy on a solid growth path, and the mid-cycle sectorial rotation process should enhance the vitality of the economic expansion.
The recent housing boom and the current downswing in housing market activity may have some adverse indirect impacts on the economy. However, neither a fading housing wealth effect nor a rising number of households subject to “payment shock” on adjustable-rate loans should be serious enough to derail the economic expansion.
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 Sept. 6 edition. To subcribe to “Eye on the Economy,” click here.
 Attend the NAHB Construction Forecast Conference
Don't miss NAHB's fall Construction Forecast Conference for the latest economic news about the housing industry. Join NAHB on Oct. 25 for the Construction Forecast Conference — Fall 2006 in Washington, D.C.
If you can't attend in person, sign-up for the Webcast.
To register for either, visit www.nahb.org/cfc.
 Want to Know Your State's Starts Forecast for 2007?
Find out in HousingEconomics.com’s State Starts Forecast (sample). The starts forecast includes downloadable Excel tables of total, single-family and multifamily starts by region and state.
To learn more, visit www.housingeconomics.com.
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