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Eye on the Economy: Policy Support for Housing Needed
 Available data suggest that gross domestic product (GDP) growth will be only slightly positive in the first quarter of this year — we’re estimating 0.3% ― following the “final” estimate of 0.6% growth for the final quarter of 2007.
This pattern of growth, which most likely will extend into the second quarter, is consistent with moderate declines in payroll employment as well as increases in the unemployment rate during the first half of this year.
Whether or not the business cycle dating committee at the National Bureau of Economic Research will eventually identify an economic recession in 2008 is an open question.
We continue to say “no,” but it’s a very close call. The ultimate outcome will depend heavily on the effectiveness of the recently enacted economic stimulus legislation, dominated by more than $100 billion in personal income tax rebates that will begin in May.
The chances for recession rise dramatically if consumers simply sit on the money, and recent deterioration in measures of consumer confidence and sentiment suggest that the impact of the tax rebates may be quite muted.
Consumer Confidence and Sentiment Continue to Weaken
The Conference Board’s measures of consumer confidence and the University of Michigan’s consumer sentiment index both weakened in March, particularly the components dealing with expectations for future economic conditions.
Falling prices for homes and equities, record-high energy costs, a weakening job market and a drumbeat of bad economic news in the media obviously are sapping the spirits of the American consumer.
The fate of the current economic expansion depends critically on personal consumption expenditures (PCE), which account for about 70% of total GDP. PCE growth was robust during the 2004-to-2006 period and even in the early part of 2007, but growth has been tapering down since then. Indeed, real PCE growth was slightly negative in January and dead flat in February.
The data through February point toward roughly 1% growth in real PCE for the first quarter as a whole, probably enough to keep the economy out of recession, but the confidence and sentiment measures suggest that PCE could contract seriously in March.
Key Inflation Measures Recede, Much to the Fed’s Liking
The weakening economy is having some beneficial effects on the inflation front. The core consumer price index (excluding food and direct energy prices) decelerated in February to a 2.3% pace (year-over-year), falling back within the Fed’s apparent tolerance range for this measure.
The Fed’s favorite inflation gauge, the core price index for personal consumption expenditures, slipped to a 2.0% pace (year-over-year) in both January and February, returning to the upper end of the Fed’s apparent comfort zone for this key measure.
The Fed has been projecting a slowdown in core PCE inflation in 2008, and that pattern apparently is materializing despite inevitable leakage into the core from high food and energy costs and despite some inflationary impulse from the weakening dollar through rising import prices.
At least for now, the inflation picture clears the way for further easing of monetary policy to counter the weakening economy and ongoing strains in credit markets.
We continue to expect half-point cuts in both the federal funds and discount rates at the conclusion of the next meeting of the Federal Open Market Committee (FOMC) on April 30.
Home Prices Are Falling Faster and in More Places
The decline in national average house prices has been gaining momentum, and price declines are showing up in more and more places as the national downswing deepens.
The S&P/Case-Shiller Home Price Index for 20 large metro areas showed a year-over-year decline of 10.7% in January. On a seasonally-adjusted basis, this measure was down by 11.7% from the peak in mid-2006 and the annualized rate of decline for January came to nearly 24%. Furthermore, 19 of 20 areas have been contracting systematically since last September and all areas are down since last November.
The monthly national house price index produced by the Office of Federal Housing Enterprise Oversight, based on purchase transactions financed by mortgages held or securitized by Fannie Mae and Freddie Mac, fell by 3.0% on a year-over-year basis in January and declined at a seasonally adjusted annual rate of 13% for the month.
This data system essentially covers the national “conforming” mortgage market and excludes jumbo mortgages as well as most subprime mortgages.
The median price of existing single-family homes sold in February was down by 8.7% on a year-over-year basis, according to the National Association of Realtors®. The median sales price was up slightly in the Northeast region but down in all other regions of the country — paced by a 13.8% setback in the West.
A Mixed and Confusing Pattern of Home Sales
Sales of new homes continued to trail down in February, falling by 1.8% to a level that’s 30% below a year earlier and 58% below the peak in mid-2005. On the other hand, sales of existing single-family homes moved up by 2.8% in February, following a slight increase in January. The February level was only 23% below a year earlier and 30% below the peak in 2005.
There are some definitional differences between the data series for new and existing home sales (contracts signed vs. closings), but that shouldn’t account for the different patterns of movement during the contraction.
The more rapid decline in new-home sales from the 2005 peak, as well as the more rapid increase in new-home sales during the earlier expansion phase of the cycle, may simply reflect heavier involvement of investors/speculators in the new-home market during the boom and their rapid exodus during the bust.
With respect to the most recent divergence in movement between new and existing homes sales, the relative strength of existing home sales may simply reflect resales of homes taken by lenders during the rising wave of foreclosures — hardly a sign of market vitality.
Homes sold through auctions apparently fall through cracks in the data systems, but foreclosed homes that are listed for sale apparently are counted in the existing-home sales figures.
Housing Affordability and Home Buying Conditions Improve, But…
The housing affordability index (HAI) by the Realtors® has been on a steady climb since last August, and in February the HAI got back to the level that had prevailed in early 2004 — just prior to the massive downslide in this measure. Recent improvements have been driven by large declines in median home prices and mortgage interest rates as well as by growth in median family income.
The University of Michigan’s home buying conditions index (HCI), based on the monthly surveys of consumer sentiment, also has climbed off the deck since last summer, although this measure remains well below the highs of 2002 to 2004.
More than half of consumers saying that home buying conditions were “good” in February cited lower house prices, and about one-fourth cited low interest rates.
The major rebound in the HAI and the lesser rebound in the HCI have not yet been reflected in actual home sales. One key reason is a dramatic tightening of mortgage lending standards, as reflected in higher downpayment requirements, lower allowable debt payment-to-income ratios and higher required credit scores.
The HAI simply cannot capture shifts in these conditions, and it’s likely that most consumers who are rating home buying conditions for the University of Michigan are not fully aware of what’s happened to mortgage lending standards.
Bernanke Stresses Seriousness of Housing Contraction
Testifying before the Congress’ Joint Economic Committee on “The Economic Outlook” last week, Fed Chairman Ben Bernanke said that the near-term economic outlook has weakened, relative to projections released by the FOMC at the end of January and conceded that financial markets remain under considerable stress despite recent Fed actions to inject liquidity and stabilize the situation.
In response to a question at the hearing, Bernanke said that “recession is possible” in 2008, although the Fed’s baseline forecast has little or no growth in the first half of this year, stronger growth in the second half ― largely due to stimulative monetary and fiscal policy — and essentially trend growth in 2009. This pattern is similar to NAHB’s baseline (most probable) forecast.
Bernanke stressed that the housing contraction is the biggest issue facing the economy and the financial markets, and he added that the timing of the housing market recovery will largely determine the timing of the pickup in overall economic activity.
With respect to the ongoing turmoil in financial markets, Bernanke fingered the ongoing deterioration of mortgage credit quality and associated write-downs of mortgage-related portfolios at large financial institutions. On this front, he noted that falling house prices are the main culprit and he suggested that the key to stabilization of credit market conditions is stabilization of house prices. In this regard, he failed to offer a forecast of house prices.
In response to questions about the housing contraction, Bernanke stressed that Congress should take steps to support new lending and home buying as well as to help limit preventable foreclosures on outstanding mortgages. On the latter front, he has supported write-downs of underwater mortgages by investors/servicers and the use of FHA to insure replacement mortgages.
More Policy Support Needed for Housing
The Federal Reserve and the regulators of the three housing government sponsored enterprises (GSEs) recently took a number of important steps to shore up the U.S. housing finance system. These steps were necessary to buoy mortgage-backed securities markets and to encourage the GSEs to channel more funds into housing finance.
However, it’s increasingly obviously that neither the Fed nor the GSE regulators have the power to solve the core housing problem in the U.S. — a heavy overhang of supply and a dangerous downslide of house prices.
Congress and the Administration need to get in the game, taking prompt action to spur home buying and halt the upswing in foreclosures.
A temporary program of tax credits for home buyers definitely would spur buyer demand in short order.
Write-downs of mortgage principal for underwater loans, combined with FHA financing of replacement mortgages and some type of recapture arrangement, also are being discussed in policy circles and could be effective on the foreclosure front.
This measure would complement existing efforts (HOPE NOW and FHA-Secure) to deal with payment shock on subprime adjustable-rate mortgages.
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 April 2 edition. To subscribe to “Eye on the Economy,” click here.
 Attend the Spring Construction Forecast Conference in April
Plan to attend NAHB's Spring Construction Forecast Conference on Thursday, April 24 at the National Housing Center in Washington, D.C. The conference brings together the nation's premier housing economists and finance experts for an in-depth examination of the economic outlook for the housing industry.
Can't attend? Watch the conference webcast live.
For more information, or to register for the conference or webcast, visit www.nahb.org/cfc.
 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.
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