Eye on the Economy: Bottom of the Housing Cycle Is in View
The U.S. economy weakened considerably toward the end of 2007. Various indicators have contributed to this disturbing pattern, but the employment report for December was the real shocker.
Payroll employment growth slipped to a meager 18,000 — next to nothing in today’s economy — and employment in the private sector (excluding government) went negative for the first time since 1991.
Furthermore, the unemployment rate jumped from 4.7% to 5.0%, an outsized change to say the least.
NAHB’s forecast of growth in real gross domestic product (GDP) now stands at 1.5% for the final quarter of 2007, down from 4.9% in the third quarter of the year. In addition, we’ve cut our estimate of GDP growth for the first quarter of this year to a meager 1.2%, and we expect a lackluster performance from the labor market as well.
The economy now is skating dangerously close to recession, and some unforeseen shock, such as a sustained oil price surge, could tip the economy into the red zone.
NAHB’s baseline (most probable) forecast shows maintenance of slow but positive economic growth through mid-2008, navigating successfully through the danger zone, although the probability of near-term recession certainly is elevated to 40%.
Monetary Policy Should Be Eased Substantially
The Federal Reserve is well aware of the dangerous weakness in the U.S. economy. Indeed, the minutes from the Dec. 11 meeting of the Federal Open Market Committee (FOMC) not only revealed a lot of concern among FOMC members about the near-term economic outlook, they also referred to forecast downgrades by the Fed staff.
Concerns of both FOMC members and Fed staff centered on the deepening housing correction, housing “spillover effects” and persistent turmoil in financial markets. The unexpectedly weak employment report for December certainly has fueled concerns about the true condition of the U.S. economy.
The Fed presumably will set aside any concerns of latent inflationary pressures (associated partly with record high oil prices) and focus primarily on keeping the “real” economy afloat.
NAHB’s forecast currently assumes a half-point cut in both the federal funds rate target and the discount rate at the Jan. 30 FOMC meeting, followed by additional quarter-point cuts at the March 18 meeting — taking the funds rate to 3.5% and the discount rate to 4.0% by the end of the first quarter.
The Fed also will continue with the new Term Auction Facility as an efficient way to supply liquidity to depository institutions, through the discount window, and to improve the functioning of money markets — a prerequisite to normal functioning of other components of the credit markets.
The Housing ‘Correction’ Process Is Well Underway
The stunning housing downswing that followed the unsustainable boom of 2003-2005 got an extra, and unanticipated, push from waves of turmoil in the mortgage finance system during 2007. Fortunately, a good bit of the necessary correction process in housing and mortgage markets is now under our belts.
Housing market imbalances generated during the boom were corrected to some degree during the 2006-2007 housing downswing. To address flagging demand, many sellers of new and existing homes cut prices and offered a variety of non-price sales incentives. At the same time, median household income grew at a healthy rate ― about 5% per year.
As a result, house price-to-income ratios have fallen in most places and standard measures of affordability (incorporating prime mortgage market conditions) recently have been on the rise in all major regions of the country.
On the supply side of housing markets, builders have cut back dramatically on production of new housing units, dropping single-family starts by more than 50% from the cyclical high two years ago. These cutbacks have led to modest reductions in unsold inventories of new homes, and inventories also are off recent highs in the existing-home market.
In mortgage markets, the unsound practices that helped fuel the boom generally were weeded out during 2007, and we’re not looking for further tightening of mortgage lending conditions in 2008. Indeed, quality spreads within the market may very well narrow to some degree.
Policy Adjustments Will Be Supporting Housing in 2008
NAHB’s forecasts for the economy and the housing market in 2008 are based on a set of critical and plausible policy assumptions.
First of all, we’re assuming that the Federal Reserve will manage monetary policy throughout the year to keep the economy out of recession, to maintain decent growth in employment and household income and to maintain historically low levels of prime conventional conforming mortgage rates.
We’re also assuming that a modernized FHA mortgage insurance program will grow nicely in 2008, filling a good part of the gap lift by shrinkage of the subprime market. With respect to outstanding subprime ARMs facing payment resets, we’re assuming good success from the “FHASecure” program as well as from the private sector “Hope Now” program sponsored by the Bush Administration.
In addition, states should be given leeway to refinance subprime ARMs under the tax-exempt mortgage revenue bond program.
We also expect portfolio limits on Fannie Mae and Freddie Mac to be eased, giving the GSE’s more leeway to help refinance subprime ARMs. And an increase in the conforming loan limit, if implemented, will allow the GSEs to provide needed support to the market for prime “jumbo” mortgages — those above the current $417,000 limit.
The Bottom of the Housing Cycle Is in View
Further reductions in home sales and housing starts are virtually inevitable in 2008, on a year-over-year basis, even if our policy assumptions are realized.
Indeed, NAHB’s current forecast shows a 20% decline in total housing starts this year, on the heels of an estimated 25% reduction in 2007.
While 2008 looks to be a down year (in total), we expect key turning points to occur within the year.
We’re looking for home sales to turn upward before mid-2008, on a national average basis, and we expect recoveries in housing starts and construction spending to commence before the end of the year.
As usual, housing market performance will vary considerably across states and metro areas, depending on fundamental economic conditions and differences in supply-demand relationships in geographically diverse housing markets.
The Longer-Term Housing Outlook Is Excellent
The boom-bust housing cycle will be behind us before long, and the longer-term market fundamentals promise to be quite solid.
NAHB’s estimates of household formations, housing replacement needs and housing vacancies, including second homes, support a long-term forecast showing average annual housing starts of 1.85 million units over the next 10 years ― close to 2 million units including manufactured (HUD-code) homes. We currently expect to reach this level by 2011 or 2012, coming off the lows of 2008.
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 Jan. 9 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).
Get the metro forecast with in-depth analysis, overviews and downloadable Excel tables.
To learn more, visit www.HousingEconomics.com.
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.