Housing Economics - 09/21/2010 (Plain Text Version)

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In this issue:
Housing Starts Rise 10.5 Percent in August as Builders Struggle to Obtain Financing
2010 Single Family Builder Compensation Study
The National Outlook Preview - August 20, 2010
Housing Market Statistics

The National Outlook Preview - August 20, 2010

Highlights

Growth of the U.S. economy has been revised downward for the 2007-2009 period, making the Great Recession even deeper than originally recognized. We’ve trimmed our near-term forecast from last month, but we expect the economy to avoid a double dip recession and to gather forward momentum in both 2011 and 2012.
Despite the generally downbeat nature of the historical GDP revisions, GDP growth for the first quarter of this year was revised upward. Inventory investment, consumer spending and business investment in equipment and software offset sizeable negative contributions from residential and nonresidential construction, imports, and spending by state and local governments.
Unfortunately, the strong first-quarter performance was temporary. The “advance” report on GDP for the second quarter shows a slowdown to 2.4% growth and monthly data released since the advance report indicate a substantial downward revision to second-quarter growth when the “second” estimate is released later this month.
The recent downshift in GDP growth has shown up in the labor market. Private payroll employment posted meager gains in the May-July period and large reductions in federal Census workers produced sizeable declines in total payroll employment in both June and July. Continuing Census worker reductions will undercut employment numbers in August and September, but should be largely finished by the fourth quarter. We expect payroll employment to grow 1.5% in 2011 and 2.3% in 2012 and the unemployment rate to trail down to 8.1% by the fourth quarter of 2012.
Large negative GDP gaps and slack in labor markets and resource utilization create downward pressures on price inflation. NAHB’s forecast shows core PCE inflation of only 1.1% in the second half of this year and 1.0% in 2011, followed by a modest pickup in 2012 as the economy gains some ground.
The August 10 FOMC meeting kept the Fed’s target range for the federal funds rate of 0.00 to 0.25%. The Fed is still committed to its policy of exceptionally low levels of the funds rate for an extended period (the so-called EE phase).
The Fed will reinvest principal payments from housing agency debt and MBS in longer-term Treasury securities to avoid draining reserves from the banking system. The move suggests that the Fed could once again adopt quantitative easing (QE) policies that increase the size of the Fed’s balance sheet as well as excess reserves in the banking system.

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