|
Eye on the Economy: The Housing Recovery Will Have to Wait a While
 The as-yet unofficial economic recession is deepening as we roll through the fourth quarter, and downward economic momentum undoubtedly will extend into the early part of 2009.
It now appears that the current recession will be the most serious downturn since the early 1980s, and this one could turn out to be even worse if policymakers fail to react effectively
Real gross domestic product (GDP) contracted at a 0.3% rate in the third quarter, according to the Commerce Department’s “advance” estimate, a smaller decline than we had projected. However, key monthly data released since then point toward a sizable downward revision to the advance estimate, and it’s clear that economic activity was weakening progressively during the quarter — setting up weak “initial conditions” for the fourth quarter of the year.
Virtually all components of domestic spending have been weakening recently, including consumer spending, business investment and residential construction, and support from the foreign sector (net exports) is giving way as well.
We now expect real GDP to contract by about 3.5% in the fourth quarter, and there are downside risks to that projection.
We currently expect the economy to regain its footing during the second half of next year, aided by further declines in commodity prices (including oil), lagged effects of massive monetary stimulus from the Federal Reserve and foreign central banks, and substantial fiscal stimulus from Congress and the new administration.
The Fed definitely cannot stabilize the economy on its own, and timely fiscal stimulus now is absolutely essential to prevent a downward economic spiral next year.
We’re not counting on enactment of a fiscal stimulus package during the current lame-duck session, although that’s still a possibility. We are counting on a substantial fiscal package by early next year — something in excess of $200 billion ― hopefully including help for the struggling housing sector.
The Job Market Is Losing a Lot of Ground
The job market has been losing ground since late last year, and the retreat has accelerated recently.
Nonfarm payroll employment fell by 240,000 in October and the numbers for the two previous months were revised down substantially. The cumulative decline so far this year amounts to nearly 1.2 million and the experience since mid-year definitely is in classic recession territory.
The unemployment rate naturally has been rising as payroll employment has fallen. The civilian unemployment rate jumped from 6.1% in September to 6.5% in October, and this rate now is more than two percentage points above the low of last year. Broader measures of slack in labor markets, including discouraged workers and those working only part time for economic reasons, have made even more dramatic moves.
Further deterioration of labor market conditions is inevitable during the period ahead. The average pace of job losses experienced in recent months — roughly 200,000 — is likely to extend through the rest of this year and the early part of 2009, and growth job may not emerge until late next year.
We now expect the unemployment rate to top out near 8% in the fourth quarter of 2009, higher than the peaks reached in the 1990-1991 and 2001 recessions but still well short of the peak in the early 1980s.
Financial Markets Remain Under Stress
There are signs that the functioning of short-term credit markets has improved to some degree from the virtual lock-up experienced in the first half of October, and central banks can take a lot of credit for that. Their liquidity-enhancing efforts have been impressive, and a new Fed purchase facility is propping up the commercial paper market as well.
Credit market improvements have shown up largely in the so-called TED spread (three-month dollar Libor less three-month Treasury yield), a key measure of risk aversion, and in the spread between the three-month dollar Libor and the federal funds rate target expected to prevail over the next three months — a measure of cash scarcity among banks.
But despite recent improvements, these spreads remain wide and conditions are even more serious in longer-term credit markets. To make matters worse, equity markets have been throwing off ugly signals with no clear bottom in sight.
The Interest Rate Structure Is Bent Out of Shape
The weakening economy, expectations of additional Fed easing and extreme risk aversion in credit markets have been putting strong downward pressure on short-term Treasury yields, driving the one-month and three-month rates to extremely low levels.
At the same time, expectations of soaring Treasury issues — to finance the recently enacted $700 billion “Troubled Asset Relief Program” as well as a large prospective fiscal stimulus package — have put upward pressure on longer-term Treasury rates.
This combination of forces has produced a Treasury yield curve with a very steep upward slope, a structure that does not bode well for longer-term borrowing by the private sector. Furthermore, substantial risk premiums are being piled on top of Treasury yields, particularly for longer-term credit.
Mortgage Financing Conditions Are Extremely Tight
Fixed-rate home mortgages are essentially the only game in town, since hardly any lender wants to make adjustable-rate mortgages in the current environment.
Unfortunately, the high 10-year Treasury rate, combined with a very wide spread of mortgage rates over Treasuries, has kept even the prime conventional conforming mortgage rate significantly above 6%.
Required yields on jumbo home mortgages are hanging above 7%, reflecting the total breakdown of the private-label mortgage-backed securities markets as well as investor aversion to any credit instrument without clear government backing.
We’re expecting long-term Treasury rates to recede in coming quarters, and we expect the mortgage-Treasury spread to gradually narrow over time — dropping the prime fixed-rate mortgage to about 5.6% by the middle part of 2009. But this outcome is hardly a slam-dunk, in view of daunting uncertainties about the course of the real economy and the condition of financial markets.
Even if mortgage interest rates behave reasonably well, prospective home buyers are sure to face stringent mortgage lending standards in the foreseeable future.
The Fed’s October survey of senior loan officers at commercial banks showed that large majorities of banks had tightened their lending standards on all types of home mortgages during the previous three months. This round of tightening came on top of the systematic tightening process that began in earnest around the end of 2006.
The cumulative tightening in mortgage lending standards now is the most serious on record.
More Monetary Stimulus Is on the Way
Central banks here and abroad fortunately have a lot of leeway to adjust monetary policies without prior political approval, and we’ve been witnessing impressive rounds of monetary ease by the Federal Reserve and key foreign central banks.
But monetary policy stimulus can prove to have little immediate kick when depository institutions are afraid to lend, even to each other, and private sector participants (consumers and businesses) don’t want to borrow and spend.
Unfortunately, that seems to characterize the current situation in the U.S. and many other parts of the world at this time.
But central banks are not about to give up. We’re looking for further reductions in key policy rates at home and abroad.
In the U.S., we expect the Fed to drop the target federal funds rate from 1% to 0.5% at the Dec. 16 meeting of the Federal Open Market Committee, and the discount rate should be cut by the same amount.
We also expect the Fed to hold this highly stimulative monetary policy stance throughout 2009. The lagged effects of monetary stimulus are bound to gain traction during 2009, helping to limit the depth and duration of the recession.
Housing Market Indicators Are Downbeat
Available housing market indicators display considerable weakness in October, and early signals for November are hardly encouraging.
NAHB’s monthly single-family Housing Market Index (HMI) hit a record low of 14 in October, and preliminary tabulations point toward an even weaker reading for November (to be released on Nov. 18). We’re seeing record lows for all three components of the HMI ― current sales, buyer traffic and sales expectations — as well as for the four major regions of the country. The decline in the HMI has been particularly striking in the West region.
NAHB’s proprietary survey of 30 large single-family builders has confirmed considerable weakening of housing demand in October. Gross sales (new orders) fell sharply on a seasonally adjusted basis, the number of sales cancellations ticked up and net sales registered a very large decline for the month.
Seasonably-adjusted cancellation rates calculated from our big builder survey moved up in October, whether measured relative to current gross sales or to the backlog of signed sales contracts. These increases essentially wiped out improvements that had occurred in earlier months of the year.
In October, we asked single-family builders of all sizes about their building plans for the first half of 2009, compared with the pace of activity in the second half of this year. Fifteen percent said they plan to start more units in the first half of next year, but half of all respondents said they plan to start fewer units.
On balance, the survey results definitely point toward lower single-family starts during the first half of 2009.
The Housing Recovery Will Have to Wait a While
The recent downward momentum in housing markets is bound to extend into 2009, aided and abetted by a weakening national economy and stringent financial market conditions. And, of course, there is still a daunting overhang of vacant housing units in both the for-sale and for-rent components of the housing market.
We’ve recently trimmed our estimates of new-home sales and housing starts for the balance of this year and for 2009.
This means that the housing production component of GDP (residential fixed investment) will continue to put heavy downward pressure on U.S. economic activity through mid-2009 and will provide only mild support to GDP growth in the second half of the year.
But that switch in direction is essential to the beginnings of economic recovery in the latter part of next year.
The Economy Heavily Influenced the Election
Barack Obama’s ringing success in the presidential election was due largely to the deterioration of the economy under the incumbent Republican administration.
Presidential election models that include economic factors such as the unemployment rate, personal income growth and oil prices predicted an Obama victory quite close to the actual outcome.
Of course, the faltering economy has now switched from being an Obama ally to the incoming President’s greatest challenge.
Let’s hope that the new administration and the new Congress will be equal to the task. Let’s also hope that policymakers include strong measures to stimulate home buying and stem foreclosures in the next fiscal stimulus package.
Such measures would pay handsome dividends for both the real economy and the financial markets.
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. 13 edition. To subscribe to “Eye on the Economy,” click here.
 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.
|
