Housing Economics - 06/16/2009 (Plain Text Version)

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In this issue:
Housing Starts Increase in May
National Outlook
Housing Market Statistics At-A-Glance

National Outlook

Highlights

The economic contraction is losing some steam, following two consecutive quarters of major retrenchment. Real GDP most likely will decline further in the current quarter, but at a much slower pace. There’s a good chance that economic growth will turn positive in the second half of this year, albeit at a below-trend pace, and gain strength in 2010 and beyond.
The labor market continues to take heavy hits, and that pattern most likely will persist for some time as improvements in the job market follow the turnaround in GDP growth with typical time lags. Stabilization of the labor market should occur by early next year, and above-trend GDP growth will generate systematic improvements as the recovery gains steam.
Inflation is running low in the U.S. but the threat of destructive deflation is fading as the economic picture begins to brighten. Recent declines in top-line inflation measures reflect sharp declines in commodity prices from their 2008 highs, and key measures of core inflation have remained comfortably in the black. Core inflation most likely will recede to some degree in the near future but not slip into the red zone, an ideal outcome from our central bank’s point of view.
Financial markets are healing slowly, following the massive damage inflicted on debt and equity markets by the unprecedented global shock that rocked the systems late last year. Government efforts at home and abroad have yielded some benefits, and there’s more to come on that front. But there’s a long way to go before most financial markets are functioning normally; meanwhile, U.S. and global economies remain highly vulnerable to future shocks.
The G-20 report did endorse use of stimulative monetary policies around the world, including low interest-rate policies as well as unconventional policy measures--including quantitative easing. In this regard, countries that tend to focus on inflation risks, particularly those in Western Europe, placed a good deal of emphasis on central bank exit strategies. Ironically, the G-20 failed to systematically address the issue of bad assets on the books of commercial banks here and abroad, a daunting problem that continues to choke financial systems and credit flows.
The Fed held monetary policy steady at the April 28-29 FOMC meeting, keeping the federal funds rate close to zero and committing to that position for an extended period. The Fed also reaffirmed its commitment to employ unconventional “balance sheet” policies to support the economy. The Fed most likely will maintain a stimulative monetary policy stance for quite a while, particularly in view of downgraded projections for the economy and the labor market contained in the minutes to the April FOMC meeting.
Prime fixed-rate home mortgage rates have been hovering in a narrow and historically low range since mid-March, due partly to the Fed’s commitment to buy huge amounts of agency debt and mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. The spread between prime home mortgage rates and yields on 10-year Treasury securities has narrowed recently and most likely will continue on that path, helping to keep mortgage rates in a favorable range for some time.
Measures of housing affordability have improved dramatically, reaching record highs in the early part of this year. The improvements have been driven by the declines in mortgage rates and by large cumulative declines in house prices in many parts of the country. The standard measures do not capture the influence of changing mortgage lending standards, house price expectations of prospective buyers or the current and expected economic environment, but these limitations do not negate the importance of the affordability measures.
Recent surveys of consumers and builders signal some revival of home buyer demand. Surveys of consumer sentiment show a substantial upswing in the proportion of households with positive views of home buying conditions, driven by the declines in home prices and mortgage rates. And NAHB’s surveys of single-family builders show distinct improvements in gross and net home sales at large builders as well as significant improvement in home builder sentiment in April and May.
Housing production still is profoundly weak, in total, but recent housing production patterns are quite a mixed bag. Housing starts and permits for April showed some improvements in the single-family sector, but sharp retrenchment was registered in the multifamily sector - reflecting considerable weakness in the condo market as well as in the markets for both subsidized and market-rate rental projects. Extremely stringent conditions in multifamily credit markets apparently are behind the recent downshift.
Tight conditions in the markets for loans to acquire and develop land and to construct homes (the AD&C credit markets) will sap the strength of the upcoming recoveries in both single-family and multifamily housing production, at least in their early stages. The Federal Reserve’s most recent survey of bank loan officers revealed further tightening of lending standards in these areas and pointed toward further tightening down the line. And NAHB’s most recent survey of builders showed progressive tightening of lending terms and standards for prospective new loans as well as for outstanding credits in all components of the market.
NAHB’s baseline (most probable) housing forecast shows a trough for home sales (new and existing) in the first quarter of this year, a trough for total housing starts in the second quarter, and a trough for real residential fixed investment (RFI) in the fourth quarter. The drag on GDP from the contraction in RFI was the heaviest in the first quarter of this year (1.4 percentage points) but the drag will ease as the year progresses and RFI should then turn into an engine of economic growth.

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