October 23, 2002

By David F. Seiders
NAHB Chief Economist

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The U.S. Economy Stumbles Again . . .
The economy has been struggling through the early stages of recovery so far this year as a series of shocks prevented smooth acceleration out of the 2001 recession. The recovery looked quite promising early in the year, but then the shock waves from “Enron-itis” and related scandals took a heavy toll on the stock market as well as business and consumer confidence. Economic growth weakened a good bit during the second quarter. The third quarter brought better news as consumer spending picked up and business spending on capital equipment and inventories staged a revival of sorts, driving the overall economy toward a more respectable growth rate. (We’re estimating about 4%.)

But more trouble was brewing even before the third quarter ended, and it’s now clear that the U.S. economy has stumbled again – reviving fears of a bona fide double-dip recession. The withdrawal of sales incentives by U.S. automakers is one of the recent downers. Downward pressures also have been applied by weaker demands from abroad, the West Coast dock strike, and concerns over imminent war with Iraq.

NAHB’s forecasts still show positive (but weak) economic growth for the final quarter of this year and smoother acceleration during 2003. But these forecasts are vulnerable to unpleasant surprises on a number of fronts, particularly the situation with Iraq.

Financial Markets Have Been Whipsawed . . .
The key shock absorber for the U.S. economy has been the structure of interest rates. The Fed held short-term rates at historic lows all year while a flood of money from the beleaguered stock market to the safe haven of Treasury securities drove most longer-term rates (including mortgage rates) downward. Indeed, long rates hit incredibly low levels by early October, when the 10-year Treasury bond yield fell to 3.6% and the 30-year home mortgage rate slipped below 6% for the first time since the mid-1960s.

It looks like both the stock market and long-term rates bottomed out on Oct. 9. A few surprisingly good earnings reports from Corporate America drove back the stock market bears and energized hopes of a new market upswing, causing a reflow of money from bonds to stocks. In what seemed like a blink of the eye, major stock indexes were up by more than 10% from their lows and the 10-year Treasury yield was up by about 60 basis points!

The Fed continues to hold the line on short rates amidst volatility in both stock and bond markets, and the recent firming up of stock prices and long-term rates reduces the probability of another Fed rate cut before the end of the year (that’s consistent with our forecast). We’ll get a good test of this proposition on Nov. 6 (the next FOMC meeting). [return to top]

Housing Production Continues to Cruise . . .
In the midst of an unsteady economy and extremely volatile financial markets, the housing market continues to stage a solid and well-balanced performance that flies in the face of previously recorded history. The single-family market has been particularly robust, benefiting from declines in both long-term interest rates and the stock market as well as from the ongoing strength of house values – factors that have enhanced both housing affordability and the investment aspects of homeownership.

Recent housing market data are quite encouraging. In September, total housing starts hit the highest level in 16 years and the single-family component surged to a 24-year high. While these astounding numbers are not likely to persist for long, NAHB’s surveys of builders and lender surveys by the Mortgage Bankers Association both indicate a continued strong demand for homes in October. [return to top]

The Risks are Shifting . . .
It’s obvious that things can change fast in the stock and bond markets where expectations about the future drive current transactions. A sustained recovery in the stock market, if it materializes, will have positive impacts on the overall economy but will result in higher long-term rates – a combination that could have negative impacts on the interest-sensitive housing sector.

NAHB’s current forecast shows only modest upward adjustments to long-term mortgage rates in 2003, to 6.5% by year-end, along with a 3.5% decline in housing starts to a level that’s still excellent by historical standards. But recent developments remind us that financial markets can quickly outrun our efforts to forecast their movement. [return to top]

The ARM Safety Valve is Primed . . .
In the event that increases in long-term mortgage rates exceed our expectations, homebuyer usage of adjustable-rate mortgages (ARMs) certainly will rise, cushioning the impact on housing market activity. Even if long rates move up substantially, the Federal Reserve probably will anchor the short end of the interest rate structure well into next year, keeping the cost of ARMs at historic lows (the 1-year ARM is now around 4.25%). [return to top]

You Can Get More Information at CFC… in Housing Economics

  • Speakers from both Fannie Mae and Freddie Mac will discuss housing prices in-depth at our upcoming Construction Forecast Conference, “Is Housing the Next Bubble” at the National Housing Center on Oct. 30. To register online or learn more, click here, or call 800-368-5242 x8338 for information.

  • Housing Economics, is our monthly rigorous overview of the economy, data for more than 100 local markets, and in-depth analyses of the niches and nuances of home building markets. Available online or in print, it is written in terms that builders, manufacturers, and housing finance professionals can understand and apply to their own businesses. Go online to find out more about Housing Economics or order by calling 800-223-2665.
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For more information or to contact us directly, please visit www.NAHB.org l ©2002, National Association of Home Builders