The Seiders' Report: Housing Contraction Broadens & Deepens
• The economic expansion has lost some momentum and the slowdown in GDP growth is taking a toll on the labor market —due largely to the deepening housing contraction. Even so, the U.S. economy is not skating dangerously close to outright recession at this time and NAHB’s forecast says that recession will be avoided during the coming year.
• The slowdown in economic growth and the opening up of more slack in labor markets have helped reduce inflationary pressures in the U.S. economy. Core inflation has been receding, falling within the Fed’s apparent comfort zone, and further improvements are likely in coming quarters despite high oil prices and a falling dollar. The evolving inflation picture gives the Fed leeway to enact more monetary stimulus to support the economy, if conditions warrant.
• The wrenching credit market crisis that erupted in the early part of August has been easing off since the Federal Reserve cut short-term interest rates on September 18. Even so, private credit market conditions generally remain tighter than before the crisis, particularly in subprime, Alt-A and jumbo loan components of the home mortgage market.
• The late-summer credit crunch in mortgage markets has contributed to another major downleg in housing demand, sending sales of new and existing homes down sharply in August and putting more downward pressure on house prices. Furthermore, NAHB’s surveys of single-family home builders point toward further erosion of both gross and net sales in September, and the indications for October are sobering as well.
• The downswing in housing production naturally has deepened as housing demand has weakened further. In August, single-family starts and permit authorizations fell by 7.1% and 8.1%, respectively, and both series fell below the million-unit mark for the first time since 1995. The cumulative declines from the recent cyclical peaks are now approaching 50%, and there’s more to come.
• Despite the massive cutbacks in housing starts, inventories of new homes for sale are hardly off their 2006 highs and the months’ supply actually has moved up to a cyclical high. Only very recently have single-family starts for sale (excluding homes built on owners’ lots) fallen below the sales pace, and that relationship may not persist in the latter part of this year as the mortgage credit crunch plays out.
• Bloated inventories, particularly completed homes that are lingering on the market, have prompted many builders to offer large price cuts to reluctant buyers —often in combination with nonprice sales incentives. About half the companies report that the price cuts have been at least somewhat effective in bolstering sales and limiting cancellations, and some companies are planning large price cuts for short time frames as they attempt to jump-start the markets.
• The deepening housing downswing, including spreading price declines, poses a serious challenge to the economic expansion in the near term —due to falling housing and mortgage market activity as well as to likely “spillover” effects on personal consumption expenditures. These downside risks should encourage the Federal Reserve to ease monetary policy further before the end of the year, and we expect the Fed to maintain a stimulative policy stance in 2008.
• NAHB’s forecast has been trimmed during the past month although we still anticipate a trough for home sales early next year, a trough for housing starts around mid-year, and a trough for residential fixed investment in the third quarter of 2008. A lot has to go right for this forecast to be achieved, including skillful management of monetary policy by the Federal Reserve, maintenance of solid growth in personal income and employment, a manageable wave of home mortgage foreclosures, and better performance of mortgage markets going forward.
• Even if our forecast is achieved, the severity of the current contraction in the single-family housing market will challenge the episode of the early 1980s —a major setback that occurred when the Federal Reserve deliberately provoked the deepest economic recession since the 1930s in order to break the back of a very serious inflation problem in the U.S. economy.
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