Housing Economics - 04/16/2008 (Plain Text Version)
In this issue:
The Seiders' Report: A Housing Overview by the NAHB's Chief Economist
• 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.
• 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.
• 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.
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