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Fed Vice Chair Kohn Says Housing May Be Stabilizing
 While a lower level of housing production and adjustments in some manufacturing industries will remain a drag on output in the near-term, economic conditions should show some improvement during the first half of this year as inventories are worked off, Federal Reserve Board Vice Chairman Donald L. Kohn told the Atlanta Rotary Club in Atlanta on Jan. 8. “When this process is completed, the rate of economic growth should pick up to something in the neighborhood of the growth rate of the economy’s potential,” he said.
Kohn noted that housing and the automobile industry were largely responsible for the deceleration in U.S. economic activity during the second half of 2006. Noting that single-family housing starts in November were 30% below their peak during the first month of 2006, Kohn cited evidence that housing is close to bottoming out, although not soon enough to avoid having a negative impact on the U.S. economy for the first six months of this year.
“Tentative signs have begun to emerge that the housing market may be stabilizing,” Kohn said. “Home sales appear to have flattened out since midyear, mortgage applications have been increasing and consumers’ perceptions of home buying conditions, as reported in the Michigan survey, have improved.”
However, he warned that “even if the demand for housing is leveling off, housing activity may not yet have found a floor, given the sizable overhang of unsold houses.”
Kohn also said that the causes of the current housing downturn are different from those in the past, and that has created “considerable uncertainty” about where the industry now stands:
- The current downturn was not triggered by the restrictive monetary policy and high interest rates that have caused previous housing slumps. “Indeed, relatively low intermediate and long-term interest rates are helping to support the stabilization of this sector,” he said.
- But the current contraction “did follow an unusually large run-up in sales and construction and, even more so, in prices relative to the returns on other financial and real assets,” he said.
“Our uncertainty about what pushed home prices and sales to those elevated levels raises questions about how the market will adjust now that expectations of the rate of house price appreciation are being trimmed,” he said. “And changes in the organization of the construction industry, with activity more concentrated in the hands of large, publicly traded corporations, may also affect the dynamics of prices and activity in response to the inventory overhang.”
While Kohn said that he believed that “housing starts may be not very far from their trough,” there are risks to this positive outlook:
- “Although house prices nationally have decelerated noticeably and appear to have fallen in some markets, they are still high relative to rents and interest rates,” he said.
- “Building permits decreased substantially again in November, and inventories of unsold homes have only started to edge lower.”
- “We also do not know whether the possible stabilization that seems to be taking hold would be immune to a rise in longer-term interest rates should term premiums increase or the federal funds rate fail to follow the downward path currently built into market expectations.”
While saying that it is too early for the Fed to relax its vigilance on the inflation front, Kohn did voice optimism that core inflation is declining from the “elevated levels of last spring and summer.”
“Conditions appear to be in place for a good year for the U.S. economy, one marked by growth that is moderate and sustainable and by inflation that will be lower than last year’s,” he said.
 Want to Know the Long-Term Forecast Through 2015?
Find out in HousingEconomics.com’s Long-Term Forecast.
HousingEconomics.com includes downloadable Excel tables featuring the housing starts forecast, GDP, demographics and more.
To learn more, visit www.housingeconomics.com.
 NAHB Kit Gives Builders Back-to-Basics Tips in Changing Market
With the current cooling of the nation’s housing market expected to persist into the middle of next year, NAHB has developed a comprehensive online toolkit geared to providing association members with information that will help them prosper in today’s changing business environment.
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.
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