Housing Economics - 04/16/2008 (Plain Text Version)

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In this issue:
Housing Starts Fall Further
Quick Read: Housing Statistics
The Seiders' Report: A Housing Overview by the NAHB's Chief Economist
Executive-Level Housing Forecast: Available for Download
Housing’s Contribution to State Economies at the Peak of the Boom
Building Permits & Employment Data for 361 Metropolitan Areas
Don't Know Your Local Housing Forecast?

The Seiders' Report: A Housing Overview by the NAHB's Chief Economist

Highlights

• It’s increasingly obvious that the core problem for the housing market, the economy and financial markets is actual and expected declines in house prices. This problem is symptomatic of stubbornly weak homebuyer demand and an extremely large supply of vacant homes on the for-sale markets for both new and previously owned homes, and the upswing in mortgage foreclosures in piling more and more vacant homes onto the for-sale market.

• GDP revisions for the fourth quarter of 2007 left the overall economic growth rate at a meager 0.6%, but the estimated contraction in residential fixed investment deepened to a 25.2% annual rate and RFI subtracted a whopping 1.25 percentage points from the GDP growth rate. The housing contraction weighed on GDP growth from other directions as well, including the reeling housing finance system and components of retail sales closely related to housing market activity.

• Available data, including housing starts and building permits for January and February, point toward another sharp contraction in RFI and another very weak GDP growth rate in the first quarter of this year, a pattern that skates dangerously close to recessionary conditions. We now view a mild recession as a nearly even bet, but we also believe that aggressive actions by the Fed and the recently enacted economic stimulus package virtually guarantee stronger growth by the second half of the year.

• Recent labor market conditions are consistent with seriously below-trend GDP growth and tepid growth in labor productivity. The February employment report revealed the second consecutive decline in total payroll employment and the third consecutive decline in private payroll employment, and an ongoing slide in residential construction employment was a key factor in this pattern. Slight declines in the civilian unemployment rate in both January and February (calculated from the household survey) actually provide little comfort since these declines reflected serious shrinkage of the civilian labor force —hardly a sign of economic vitality.

• Surging commodity prices (primarily food and energy) have complicated the inflation picture in recent times and there’s also an inflationary impulse from the falling dollar (through rising import prices). These developments have prompted speculation about an emerging “stagflation” pattern in the U.S. economy and some observers believe that inflation pressures will limit the Fed’s efforts to revive the flagging economy. On the other hand, recent inflationary pressures contain some temporary influences, imported inflation is not that big a deal, and evolving labor market conditions hardly suggest upward pressure on unit labor costs —traditionally the Fed’s major inflation concern.

• We’re dismissing the threat of stagflation and believe that core inflation will be moving down, essentially clearing the way for aggressive monetary stimulus from the Federal Reserve without serious damage to longer-run inflation expectations. Recent statements and actions by the Fed make it clear that our central bank is deeply concerned about the stall-out of economic growth and the worsening rounds of turmoil in financial markets. The Fed also seems reasonably confident about its forecasts (by staff and FOMC members) of moderating inflation pressures later this year and in 2009.

• Financial markets remain under considerable stress as the mortgage-induced stampede to quality continues unabated. Equity markets have been reeling and quality spreads in corporate bond and mortgage securities markets have been widening once again; indeed, even key money-market quality spreads have widened out again. And on this round, investors have even soured on the debt and mortgage-backed securities issued by Fannie Mae and Freddie Mac, pushing out spreads between prime conventional conforming mortgage rates and yields on comparable-maturity Treasuries to the widest in many years.

• Concerns about mortgage credit quality naturally have intensified as incoming data on delinquencies and foreclosures have worsened and as evidence of serious house price erosion has accumulated. Furthermore, it has dawned on investors that homeowners’ willingness to repay their mortgages is at least as serious an issue as their ability to repay when rates reset on adjustable-rate loans. This realization has directed focus to the equity positions of homeowners, and that picture seems to be darkening daily.

• The Fed is on red alert, as the faltering economy and the serious financial market dislocations present an unprecedented set of challenges to our central bank. The Fed has been fighting a two-front war, not only managing conventional monetary policy so as to reduce the federal funds and discount rates but also rolling out a series of measures to bolster liquidity in key segments of the credit markets. The Fed even stepped in to prevent bankruptcy of a major Wall Street investment house.

• With respect to recent housing market developments, sales of both new and existing homes were down in January and the months’ supplies of unsold homes challenged record highs in both markets. On the production front, single-family housing starts and permits moved down substantially in both January and February, guaranteeing another sharp decline in residential fixed investment in the second quarter as well as ongoing losses of payroll jobs in home building.

• NAHB’s monthly surveys of single-family builders have yet to provide convincing signals regarding near-term stabilization of buyer demand or housing production. Traffic of prospective buyers has revived to some degree since late last year but the quality of traffic apparently is not high. Furthermore, gross and net home sales still are eroding and sales expectations of builders remain in the doldrums.

• This critical situation calls for government policies to stimulate homebuyer demand and to stem the flow of foreclosed homes onto the market. The Fed clearly is on the job, and major responsibilities also lie with other federal financial regulators, the Government Sponsored Enterprises, the Congress and the Administration. The deteriorating market situation is forcing serious discussions on all fronts and some adjustments have been made, but the range and depth of policy responses have yet to be determined.

• NAHB’s current housing forecast shows major declines in home sales and housing production for 2008 as a whole, although we’re showing turning points for sales and starts before the end of the year. There are major downside risks to these forecasts, however, and the ultimate outcome will depend critically on the public policy responses to the destructive downward spiral in house prices and the associated impacts on mortgage credit quality and mortgage lending standards.

Full Story

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