Eye on the Economy - 11/29/2006 (Plain Text Version)

By David F. Seiders, NAHB Chief Economist

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Third-Quarter Economic Growth Revised Upward Despite a Weaker Housing Component

Growth of real gross domestic product (GDP) for the third quarter of this year has been revised upward by the Commerce Department — to a 2.2% pace from 1.6% in the “advance” estimate. The revised growth rate still qualifies as a sub-par performance, and a similar reading is in the cards for the final quarter of 2006 ― we’re estimating 2.4%.

The housing production component (Residential Fixed Investment) was the weakest part of the revised third-quarter GDP report, contracting at an 18% annual rate and lopping off 1.16 percentage points from the overall GDP growth rate.

Another sizeable contraction in RFI is in the cards for the fourth quarter of this year, but the drag on economic growth should ease off during the early part of next year and housing should provide positive contributions to growth beyond mid-year.

Financial Markets Provide a Favorable Environment for Housing Going Forward

The convincing slowdown in economic growth has encouraged the Federal Reserve to hold short-term interest rates steady since mid-year, despite elevated readings on core consumer price inflation.

Recent statements from Fed representatives, including Fed Chairman Ben Bernanke, strongly suggest that monetary policy will be held steady at the next meeting of the Federal Open Market Committee (Dec. 12). NAHB’s forecast assumes that the Fed will maintain the current federal funds rate target (5.25%) through the first half of next year before implementing a bit of monetary ease.

Long-term interest rates have receded as the economy has slowed and probabilities of near-term Fed tightening have been marked down. Indeed, the long-term home mortgage rate recently slipped below 6.2%, the same as at the beginning of this year and not far above the cyclical low at mid-2005. NAHB’s forecast shows only slight upward pressure on long-term rates during the coming year. [return to top]

Home Sales Are Stabilizing Following a Substantial Correction

Sales of new and existing homes (including condo units) soared to unsustainable heights during 2005, and substantial downward corrections have been recorded since then. However, recent data strongly suggest that the downswing in sales hit bottom recently, at least for single-family homes, and we are now expecting sales to show some improvement by the first quarter of 2007.

Sales of new single-family homes slipped a bit in October (preliminary estimate) although the pace was equivalent to the average for the third quarter — suggesting that the abrupt downshift from the mid-2005 record is now behind us. Sales of existing single-family homes actually edged up in October and stood a bit above the third-quarter average, while sales of existing condo units continued downward in October.

Timely survey data reinforce the sales stabilization pattern and point toward some improvements before long.

NAHB’s single-family Housing Market Index bottomed out in September and recorded slight increase in both October and November — primarily reflecting a pickup in builders’ sales expectations. Furthermore, applications for mortgages to buy homes (Mortgage Bankers Association series) have been essentially stable since July following a major downshift during the previous year. [return to top]

But Inventory Overhangs Remain Quite Heavy

Although home sales are stabilizing, inventory overhangs still are quite heavy in the markets for both new and existing housing.

Inventories of new single-family homes for sale still are close to record levels, the inventory of completed new homes is at a new record, and the overall inventory-to-sales ratio was at a historically high seven months at the end of October — equivalent to the third-quarter average.

In the market for existing single-family homes, the unsold inventory is hanging around the record level reached in July and the months’ supply is stubbornly high.

Inventories of existing condo units still are climbing to higher and higher records, and the months supply was up to 9.1 October.
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And Home Prices Remain Under Downward Pressure

The inventory overhangs show that “buyers’ market” conditions still prevail in new and existing housing markets, and sellers have been under heavy pressure to lower prices in order to sell homes.

The median sales price for existing single-family homes was down by 3.4% in October (year-over-year basis) following smaller declines in August and September. The median sales price for existing condo units also has been falling for several months and was down by 5.3% in October (year-over-year).

The median sales price for new single-family homes posted a 1.9% advance in October (year-over-year) but that series is plagued by thin sampling, compositional shifts and distortions caused by non-price sales incentives provided by builders. NAHB’s surveys show that nearly half of single-family builders were cutting prices in November, by an average of 8%, and a large majority of builders were providing non-price incentives that support both sales and prices (i.e., sales prices would be lower in the absence of the incentives). [return to top]

Inventory and Price Trends Prompt Builders to Cut Back New Production

The pronounced fall-off in buyer demand, the large buildup of unsold inventory and the weakness of home prices have prompted builders to not only intensity sales efforts, but also to cut back on starts of new units and acquisition of new building permits.

Total housing starts fell by nearly 15% in October, reflecting large cutbacks in both single-family and multifamily markets, and permit issuance was off substantially as well. Indeed, single-family starts and permits were both down by 32% from a year earlier.

We expect housing starts to continue downward into the early part of 2007, despite an earlier stabilization of sales, as builders continue to work down unsold inventory.

We are now expecting starts to begin inching upward in the second quarter of next year, and that turnaround should relieve the drag on GDP from Residential Fixed Investment by the second half of 2007 — pretty much in line with the Fed’s expectations.
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