Housing Economics - 11/20/2007 (Plain Text Version)

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In this issue:
Multifamily Construction Lifts Total Housing Starts in October
The Seiders' Report: Housing Credit Conditions Tighten Further
Tax on Forgiven Mortgage Debt Hits Home Owners While Down
Quick Read: Housing Statistics
Executive-Level Forecast Available for Download
Download Building Permits & Employment Data by Metro Areas
Do You Know How Housing Impacts Your Local and State Economies?

The Seiders' Report: Housing Credit Conditions Tighten Further

Highlights

• The U.S. economy has been displaying remarkable resilience in recent quarters, despite the unfolding housing market contraction and a credit market crisis prompted by the meltdown of the subprime mortgage market. However, economic growth is slowing substantially in the final quarter of 2007 and sub-par growth is likely during the first half of 2008 as well. The probability of negative GDP growth is relatively high for the next few quarters but NAHB’s forecast says that outright recession will be avoided.

• The U.S. labor market still is performing reasonably well, although growth of payroll employment has slowed systematically from the strong pace of 2004-2006 and the unemployment rate is creeping up from recent cyclical lows. We expect continuation of tepid job growth and additional modest increases in the unemployment rate during the coming year as GDP growth runs below trend for some time.

• Key measures of core consumer price inflation (excluding prices of food and direct energy) have been well behaved in recent times despite limited slack in labor markets, surging crude oil prices and a rapidly falling dollar on foreign exchange markets. We expect the core CPI and the core PCE price index to hold within the Federal Reserve’s apparent tolerance zones over the balance of the short-term forecast horizon, helping to keep longer-term inflation expectations in check.

• The Fed enacted quarter-point cuts in both the federal funds rate and the discount rate at the end of October, building on the half-point cuts enacted at the September 18 FOMC meeting. We believe the ongoing credit market crisis and the deepening housing market contraction will compel the Fed to ease monetary policy at least once more in the near term, despite apparent preoccupation at the Fed with potential upward pressures on core inflation.

• The severe credit market crisis that erupted in August eased off to some degree in October, but things took a turn for the worse in recent weeks as a number of large financial institutions reported large credit losses and substantial write-downs of mortgage portfolios containing subprime and Alt-A home mortgages. Indeed, the deterioration of mortgage credit quality has kicked off another rush to quality, not only in mortgage-related securities markets but also in corporate bond markets.

• Recent Federal Reserve surveys show that commercial banks have substantially tightened lending standards in all major components of the home mortgage market, including the prime conforming and jumbo loan components. Standards also were tightened on commercial real estate loans, a category that includes nonresidential mortgages as well as construction and land development loans for residential and nonresidential production.

• The flight to quality in credit markets naturally is putting strong downward pressure on risk-free Treasury rates, helping to hold down required yields on prime conforming mortgages (salable to Fannie Mae and Freddie Mac), and federally insured FHA loans are staging a comeback. Even so, it’s likely that overall mortgage credit conditions will tighten further as house prices remain under downward pressure and mortgage delinquencies and foreclosures continue to rise over the balance of this year and in 2008.

• Despite swift builder reactions to an abrupt credit-related downshift in home sales during the third quarter, inventories in the hands of builders remain historically high and vacancies in the stock of new and previously owned homes still are near historic highs. Thus, single-family and condo sectors still exhibit striking “buyers’ market” conditions while rental market conditions have firmed up to some degree.

• NAHB’s surveys of large single-family home builders document ongoing erosion of seasonally adjusted gross and net home sales, closings and order backlogs through October. Furthermore, NAHB’s broad-based single-family Housing Market Index held at a record low in November as builder sentiment regarding current sales, sales expectations and buyer traffic remained in the doldrums.

• Recent developments in credit markets, recent data on housing vacancies, and recent NAHB surveys of home builders have prompted yet another cut to NAHB’s forecast of housing market activity over the balance of this year and in 2008. We now expect the recovery in home sales to begin in the second quarter of 2008, followed by upturns in housing starts and residential fixed investment by the third and fourth quarters, respectively. The estimated peak-to-trough contraction in single-family starts now stands at 50%.

• In view of the depth of the current housing downswing and the likelihood of a relatively slow recovery process in the early stages of the upswing, housing production is likely to remain below the demographically based trend level for several years beyond the 2008 trough. Indeed, it may be 2012 before the production of new housing units (including manufactured homes) approaches our estimate of the average annual pace for the 2006-2015 period (about 2.0 million units).

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