Housing Economics - 07/12/2006

The Seiders' Report
Every month, receive the economic and housing overview by NAHB’s Chief Economist David F. Seiders. The report incorporates the results of NAHB’s monthly HMI survey, the High production Builders’ survey, NAHB leadership meetings with the Federal Reserve, and feedback from over 800 local associations. The Seiders' Report tracks the health of the housing industry (new construction) with analyses of major legislative, regulatory, and executive actions as well as the impact of important technology.

• Housing is serving as a major swing factor in the economic expansion, currently transitioning from a long-standing engine of economic growth to a drag on growth in the second quarter and beyond. Fortunately, other sectors are picking up some of the slack as we move ahead.

• Payroll job growth has slowed substantially in recent months as GDP growth has decelerated, although the unemployment rate is holding at a cyclical low and growth of average hourly earnings is accelerating — a combination that can be described as the worst of both worlds.

• A three-year run of above-trend GDP growth, associated shrinkage of slack in labor markets and record-high energy costs have definitely raised inflation concerns at the Federal Reserve, even though the housing component of the core consumer inflation measures recently has been exerting strong and perverse upward price pressure.

• Citing elevated core inflation readings, the Federal Reserve enacted yet another quarter-point increase in short-term interest rates at the conclusion of the June 28-29 FOMC meeting. This adjustment lifted the federal funds and bank prime rates to the highest levels since early 2001.

• The FOMC statement of June 29 actually was less hawkish on the inflation issue than financial market participants had anticipated. As a result, long-term Treasury rates have receded a bit from pre-FOMC levels, at least temporarily.

• NAHB’s forecast assumes that the Fed will hold monetary policy steady until mid-2007, that long-term interest rates will move up only slightly from current levels, and that the entire yield structure will recede late next year as economic slack develops and inflation pressures subside.

• Recent housing data are quite a mixed bag. On balance, the evidence suggests that the housing downswing still is proceeding at a reasonably moderate and orderly pace, although downside risks to our “soft landing” scenario remain substantial.

• NAHB’s baseline (most probable) forecast continues to show gradual erosion of home sales and housing production through mid-2007, along with further slowing of house price appreciation. Rental housing and residential remodeling are relatively strong components of our 2006-2007 housing forecast.

• Our house price projections for 2006-2007 point toward slower but positive growth in housing equity, in both nominal and real terms. This positive wealth effect, on top of the huge equity position built up in recent years, will provide solid support to consumer spending even if the interest r ate structure limits the amount of equity “withdrawn” via mortgage borrowing.