The Seiders' Report: NAHB's Forecast Predicts a Bottoming Out
• NAHB’s forecast continues to project a bottoming out of housing starts and manufactured home shipments in the first quarter of this year, along with maintenance of positive real growth in residential remodeling throughout the difficult correction process for new housing. If these patterns materialize, the serious drag on GDP growth from the pronounced contraction in residential fixed investment will be easing off soon and RFI may very well be delivering modest positive contributions beyond mid 2007.
• The “final” estimate of growth in real gross domestic (GDP) for the third quarter of 2006 stands at a sub-par 2.0%, down from the preliminary estimate of 2.2% and well below the average pace for the first half of the year. Residential fixed investment (RFI) was the weakest component of the third-quarter GDP report, contracting at an 18.7% pace and subtracting 1.2 percentage points from the overall GDP growth rate.
• GDP growth undoubtedly remained relatively weak in the final quarter of 2006 (we’re estimating 2.3%), and downward trends in housing starts and residential construction put-in-place point toward another major contraction in RFI for the fourth quarter. However, we expect GDP to firm up moderately during 2007 as the drag from RFI eases off and other sectors continue to perform well, and the economy should be growing around a sustainable trend pace by 2008.
• The U.S. job market has performed remarkably well in the face of the pronounced slowdown in GDP growth since early last year, despite systematic job losses in housing production and related markets. Indeed, monthly average payroll employment growth has slowed only modestly from the cyclical highs posted in 2005, and the nation’s unemployment rate gravitated down to a cyclical low in the final quarter of 2006.
• The systematic tightening of U.S. labor markets has put significant upward pressure on average hourly earnings and some upward pressure on unit labor costs (labor cost per unit of output). Even so, key measures of core inflation (excluding prices of food and energy) have receded recently, despite persistent (and perverse) upward pressure from the imputed homeowners’ equivalent rent components. Further declines in core inflation are likely over the 2007-2008 forecast horizon.
• The minutes from the December 12 meeting of the Federal Open Market Committee (FOMC) revealed growing concern among Fed policymakers about downside risks to economic growth in the near term along with ongoing concerns about upside risks to core inflation. On balance, the minutes support our expectations for stable monetary policy at the next FOMC meeting on January 30-31 as well as further down the line.
• Financial markets have been trying to sort out often-conflicting signals on both real economic activity and core inflation, and market expectations for Fed management of monetary policy have fluctuated in the process. Long-term interest rates have backed up to some degree from their recent lows in early December, although both bond and mortgage rates still are quite low and near term prospects are good.
• Job growth, household income growth and the interest rate structure all have been favorable for housing demand, and cuts in house prices along with deepening nonprice incentives provided by sellers have been working to stem the downswing in home sales and the upswing in sales cancellations that began in the latter part of 2005. While sales activity still is receding in some areas, home sales (gross and net) appeared to stabilize late last year on a national basis.
• It’s true that relatively favorable weather conditions may have buoyed home sales in the final months of 2006, and it’s always hard to get a firm grip on fundamental housing trends during the winter months. But some forward looking measures that are based on surveys of home builders, home mortgage lenders and consumers tend to support the proposition that housing demand bottomed out late last year and that home sales may now be starting to firm up. Measures of housing affordability also support that case.
• While the housing market has experienced an impressive “correction” process since late 2005, following the unsustainable housing boom, strong “headwinds” still must be overcome before solid underlying demand fundamentals can raise housing production back to trend. These headwinds relate primarily to historically low levels of housing affordability, an ongoing retreat by investors/speculators, and historically high levels of current and potential inventory in single family and condo markets.
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