Eye on the Ecomony: Housing Vacancies Still Riding High
The U.S. Economy is showing remarkable resilience in the face of the stunning housing downswing that’s taking a heavy direct toll on economic growth and job formation while disrupting financial markets — via the abrupt decline in mortgage credit quality — in the process.
So far, the much feared “spillover” effects on other key sectors of the economy have not been serious enough to threaten the overall economic expansion.
Real gross domestic product (GDP) grew at a robust 3.9% annual rate in the third quarter — according to the “advance” report from the Commerce Department — following 3.8% growth in the second quarter of the year.
The third-quarter gain occurred in the face of a 20% contraction in residential fixed investment (RFI) that lopped more than a percentage point off the GDP growth rate.
RFI promises to put an even heavier hit on GDP growth in the final quarter of this year, and several other sectors are likely to lose some growth momentum — including personal consumption expenditures and exports.
We expect overall GDP growth to slip to about 1.5% in the fourth quarter, but we also expect growth to pick up early next year and we believe recession will be avoided during the 2008 to 2009 forecast period.
The Fed Eases Monetary Policy Again
The Federal Reserve enacted quarter-point cuts in short-term interest rates (both the federal funds rate target and the discount rate) at the conclusion of the Oct. 30-31 meeting of the Federal Open Market Committee (FOMC).
These cuts follow half-point reductions that were enacted at the Sept. 18 FOMC meeting, positioning the funds rate at 4.50% and the discount rate at 5.00%. The bank prime rate now stands at 7.50%.
The Oct. 31 FOMC statement noted that “the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction” — a judgment consistent with our economic and housing forecast.
Despite this outlook on housing and the economy, the FOMC statement expressed the judgment that “the upside risks to inflation roughly balance the downside risks to growth.”
We view this balanced risk assessment as a strategy by the Fed to give themselves maximum flexibility in altering short-term rates and to control speculation about future policy adjustments.
NAHB’s forecast contains another quarter-point rate cut at the Dec. 11 FOMC followed by stability in 2008.
Mortgage Lending Standards Tighten Substantially
The Federal Reserve’s October Senior Loan Officer Opinion Survey (SLOOS) documented systematic tightening of home mortgage lending standards at commercial banks during the August to October period. This round of tightening was on top of earlier rounds that had started in the first quarter of the year when the subprime market began to melt down.
In recent quarters, the Fed’s SLOOS has asked separate questions about bank lending standards in three components of the home mortgage market: prime, “nontraditional” (including payment-option and interest-only ARMs as well as Alt-A loans) and subprime.
In the October survey, about 40% of banks making prime loans had tightening standards (on top of 15% in the July survey), 60% of those making “nontraditional” loans had tightened (on top of 40% in July) and 55% had tightened standards on subprime mortgages (on top of a similar percentage in July).
The substantial tightening of home mortgage lending standards this year, of course, follows a substantial cumulative easing of standards during the 2004 to 2006 period. That easing process provided fuel to the unsustainable housing boom that now has come home to roost.
Prime ‘Jumbo’ Mortgage Market Tightens as Well
The Fed’s October SLOOS included, for the first time, special questions about the market for prime jumbo home mortgages — those above the $417,000 conforming loan limit. This market had been seriously disrupted during the summer as the securities market outlet for loan originations essentially shut down and depository institutions became less willing to originate and hold jumbo mortgages in portfolio.
In the Fed’s October survey, nearly half the respondent banks said their originations of jumbo mortgages had declined over the three-month survey period and about 35% of respondents said the share of jumbo mortgage originations that was securitized had declined relative to the prior survey period.
Banks tightened lending standards in various ways in the jumbo mortgage market during the August to October reporting period. Significant fractions of respondents increased loan fees and spreads of mortgage rates over their cost of funds while also requiring higher credit scores, more stringent documentation of borrower income and assets and higher minimum downpayments.
Mortgage Credit Tightening Takes a Toll on Homeownership
The turmoil in mortgage credit markets put a heavy hit on sales of new and previously owned homes in August and September, and sales cancellations moved up aggressively during those months as well.
Builders report that the virtual shutdown of the subprime and Alt-A mortgage sectors disrupted sales and closings not only in the entry-level market but also up the ladder in trade-up segments. They also report that the freeze in the jumbo mortgage securities market seriously damaged the high end of the housing market.
The U.S. homeownership rate had been gravitating downward from the record high posted in 2004 as the housing downswing deepened, and the abrupt third-quarter downshift in net home sales provoked yet another downward adjustment.
The homeownership rate now stands at 68.1% (seasonally adjusted), down from the record high of 69.3% in the second quarter of 2004 and the lowest level since the second quarter of 2003 — just prior to the explosive and unsustainable housing boom.
Recent erosion of the homeownership rate has reflected absolute declines in the number of home owners, an unusual occurrence that has been accompanied by sizeable increases in the number of renter households in the U.S.
But overall household formation, whether home owners or renters, has been weak for more than a year, reflecting deteriorating economic and financial market conditions as well as outsized household formation rates during the previous housing boom.
Housing Vacancies Still Are Riding High
Home builders reacted quickly to the third-quarter downshift in home sales, cutting back total housing starts to less than 1.3 million units (seasonally adjusted annual rate) and reducing single-family starts to 1 million — the slowest pace since the early 1990s.
However, this adjustment hardly put a dent in the inventory of homes for sale in the hands of builders, particularly when the impact of rising cancellations is factored into the analysis.
Vacancies in the stock of new and previously owned homes on the market actually moved up in the third quarter. Indeed, we’re approaching year-end with a near-record supply overhang in both for-sale and for-rent components of U.S. housing markets. The runup in recent years has been most striking in the for-sale components of single-family and multifamily housing sectors.
Commerce Department reports show nearly 6 million vacant year-round housing units on the markets at the end of the third quarter, second only to the record high in the first quarter of this year.
NAHB estimates that more than a million of these vacant units represent excess supply. That’s a heavy weight that must be whittled down substantially before housing production can return to healthy levels and house prices can resume a persistent upward trend.
NAHB Housing Forecast Trimmed Again
Incoming data on home sales and housing starts, combined with the stubbornly heavy supply overhang, have prompted yet another trim to NAHB’s housing forecasts for the final quarter of this year as well as in 2008 and 2009.
We’re still projecting troughs for home sales, housing starts and residential fixed investment during 2008, but the bottoms have been lowered a bit and the subsequent upswings have been weakened a bit.
With respect to total housing starts, the annual totals for 2007 to 2009 string out as follows — 1.36, 1.18 and 1.32 million units.
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 Nov. 7 edition. To subscribe to “Eye on the Economy,” click here.
Webcast of NAHB Fall Construction Forecast Available Till Feb. 5
The webcast of the NAHB Fall Construction Forecast Conference held in Washington, D.C. on Oct. 24. is available for purchase through Feb. 5.
The conference webcast includes panels of nationally recognized experts discussing economic trends, government policies, developments in the housing industry and the results from NAHB's recent surveys.
Purchasers will receive unlimited access to the webcast archive though Feb. 5, as well as electronic copies of the conference handouts and presentation material. Purchasers can watch at their own pace, rewind, fast forward and review important sections.
To Purchase the Webcast
To purchase the webcast, visit www.nahb.org/cfcwebcast.
For more information, contact Kate Carrigan at NAHB, or call her at 800-369-5242 x8244.
Want to Know the Housing Forecast for the Top 100 Metros?
Find out in HousingEconomic.com’s 2008 to 2009 Metro Forecast (free preview).
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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.