MultiFamily Market Outlook - 01/12/2007 (Plain Text Version)

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In this issue:
Multifamily for Older Residents Demands Different Features and Meets Different Needs
Starts Rise, but Continue to be Sluggish
Real Rents Hit Record High...Again
Growth in 2007 Will Remain Weak, but Will Pick Up in 2008
Multifamily Stocks Drops, S&P Improves Slightly

Growth in 2007 Will Remain Weak, but Will Pick Up in 2008

The “final” estimate of growth in real gross domestic (GDP) for the third quarter of 2006 stands at a sub-par 2.0%, down from the preliminary estimate of 2.2% and well below the average pace for the first half of the year. GDP growth undoubtedly remained relatively weak in the final quarter of 2006 (2.3%, according to NAHB's estimate), as downward trends in housing starts and residential construction put-in-place point toward another major contraction in residential fixed investment. However, NAHB expects GDP to firm up moderately during 2007, and the economy should be growing at a pace consistent with the sustainable trend by 2008.

The interest rate structure in the U.S. declined dramatically from early-2001 through mid-2004, largely reflecting massive easing of monetary policy by the Federal Reserve to combat the recession of 2001 and fight off a perceived threat of outright price deflation in the U.S. Indeed, the Fed held the federal funds rate at 1% from mid-2003 to mid-2004, and long-term rates also receded to historically low levels during that period. The Fed systematically raised the funds rate from 1% to 5.25% between mid-2004 and mid-2006, apparently edging monetary policy into the restrictive zone, and the Fed held monetary policy steady during the second half of last year. NAHB expects the Fed to hold the funds rate target at 5.25% through mid-2007. The forecast beyond that assumes the Fed will trim the nominal federal funds rate as a projected slowdown in core inflation puts upward pressure on the real funds rate.

Inflows of capital from abroad have limited upward movements in long-term interest rates since mid-2004, even in the face of the major run-up in short-term rates engineered by the Fed, and some inversion of the Treasury yield curve has occurred in the process. NAHB doesn't view this as a serious threat to the current economic expansion, despite some historical evidence to the contrary. Furthermore, NAHB expects only modest upward pressure on long-term rates during the coming year, with the 10-year Treasury yield remaining below 5% (on a quarterly average basis) during 2007-2008.