February 8, 2006
By David F. Seiders
NAHB Chief Economist
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Economic Growth Faltered Late Last Year But a Bounce-Back Is in Process
Growth of real Gross Domestic Product (GDP) slowed even more than expected in the final quarter of 2005, slipping to an annual rate of only 1.1% — according to the “advance” estimate released by the Commerce Department on Jan. 27. This was the lowest growth rate in three years and raised serious questions about the sustainability of the economic expansion.

Data since the release of the anemic GDP report suggest only a slight upward revision to the fourth-quarter “advance” estimate. However, the composition of the slowdown, along with available indicators of economic activity for the early part of 2006 and an obvious swing in weather conditions, point toward a nice rebound of GDP growth in the first quarter of this year.

Although the quarterly patterns have changed quite a bit, we’re still forecasting above-trend GDP growth for 2006.

The Labor Market Is Performing Quite Well But the Degree of Slack Is Shrinking
Payroll employment growth was solid in January (a net gain of 193,000 jobs). This performance, along with upward revisions to fourth-quarter payroll jobs and a downward trend in claims for unemployment insurance through January, provide reassuring evidence that forward momentum in the economy has been well maintained despite the fourth-quarter GDP shortfall. Furthermore, the nation’s unemployment rate moved down significantly to 4.7% in January, the lowest level of the economic expansion to date.

A falling unemployment rate certainly is good news for the country, although sluggish growth in the labor force and a disappointingly low labor force participation rate (66.0%) are parts of the pattern.

In any case, it’s clear that the degree of slack in labor markets is being systematically reduced, with potential inflationary consequences as the economic expansion rolls along. [return to top]

Core Consumer Price Inflation Remains Low Despite Threats from Labor and Energy Markets
Alternative measures of labor costs are throwing off somewhat different signals, but movements in average hourly earnings in the employment reports show a definite pattern of acceleration in recent months. This pattern, combined with an apparent cyclical slowdown in growth of labor productivity, has heightened concerns about rising unit labor costs down the line. The Federal Reserve, of course, views unit labor costs as the key to core inflation patterns.

Measures of core consumer price inflation, including the market-based core personal consumption expenditures (PCE) price index — the Fed’s favorite — remained very much under control through the end of 2005. But broader measures of core inflation, including the core GDP price index, have accelerated to some degree.

Some pass-through of high energy costs into core inflation is likely, and unit labor costs are likely to firm up to some degree before long. We’re projecting some increase in core inflation this year, threatening the bounds of the Fed’s implicit comfort zone. [return to top]

The Fed Hiked Short-Term Rates on Jan. 31 and Another Increase Is in the Cards
As expected, the Fed enacted another quarter-point increase in short-term interest rates at the Jan. 31 meeting of the Federal Open Market Committee (FOMC), raising the federal funds rate target to 4.5%. The FOMC statement was less committal than prior statements about future rate hikes and also dropped the word “measured” in describing the possible degree of future tightening.

In essence, these changes give the new Fed chairman, Ben Bernanke, maximum flexibility to craft future monetary policy. That’s a present from Alan Greenspan, who chaired his last FOMC meeting on Jan. 31.

The Jan. 31 FOMC statement not only insisted that the economic expansion remains “solid” despite recent “uneven” economic data (including the fourth-quarter GDP report), it also fretted about the inflation potential of tightening resource markets and elevated energy prices.

The rather hawkish tone of the statement, along with recent signals from both labor and energy markets, have compelled us to add another quarter-point rate hike to our forecast of the funds rate — to occur at the next FOMC meeting on March 28. [return to top]

Long-Term Interest Rates Appear Range-Bound But Moderate Increases Are in Store
Long-term interest rates have been rattling around in a narrow range during recent months, and the Treasury yield curve now is essentially flat. In essence, upward pressures on long rates from current and prospective Fed rate hikes have been counterbalanced by an easing of long-term inflation expectations (following the post-hurricane spike last fall) and by an ongoing strong appetite by foreign investors for dollar-denominated securities.

The recent stability of long-term rates has compelled us to trim NAHB’s forecast for bond and mortgage rates a bit across the 2006-2007 forecast horizon, despite our call for more Fed tightening in the near term. We still show a persistent updrift in long rates this year, at least on a quarterly basis, maintaining a slight upward slope to the Treasury yield curve. [return to top]

Housing Market Activity Has Come Off 2005 Peaks and Price Appreciation Is Slowing
The long-awaited housing slowdown becomes more convincing as time passes, despite seasonal- adjustment difficulties during the winter months.

Housing starts and building permits both were down by 3% in the fourth quarter, single-family home sales (new plus existing) were down by 4%, sales of existing condos were down by 6% and “pending” sales of existing single-family homes (based on contracts signed rather than closings) also were off by 6%.

In December, the median price of existing homes sold (single-family plus condo) was up by 10.5% on a year-over-year basis, down from appreciation rates of more than 15% a few months earlier.

NAHB’s single-family housing market index (HMI) hit its expansion high in June (72), slipped systematically to 57 in December and then stabilized in January. Indeed, the components for current sales, buyer traffic and sales expectations have receded by equivalent amounts.

Furthermore, weekly surveys of home mortgage lenders (conducted by the Mortgage Bankers Association) also show rather convincing signs of slowdown. The index of applications for mortgages to buy homes, available through early February, shows an 11% decline from its late-September high (four-week moving average basis). [return to top]

Both Homeownership Rates and Multifamily Rental Vacancy Rates Are Down from Record Highs
Soaring costs of home buying combined with sluggish growth in apartment rents have led to erosion of the nation’s homeownership rate and a simultaneous reduction in the multifamily vacancy rates — both from record highs posted in the early part of 2004. Indeed, the vacancy rate for apartments in buildings with five or more units has fallen from 12.0% to 9.5% in the process, retreating to a level not seen since early 2001.

While multifamily rental vacancy rates have been tumbling, the rental vacancy rate for single-family homes has been climbing to higher and higher levels.

For the first time in recorded history, the single-family rate climbed above 10% and actually exceeded the multifamily rate in the final quarter of 2005. The strength of this movement is symptomatic of the dramatic upswing in the investor share of home purchases since the late 1990s. [return to top]

NAHB’s Housing Forecast Shows an Orderly ‘Simmering Down’ Process in 2006
Evidence of a recent housing slowdown — as well as our forecasts for overall economic activity and the interest rate structure — point toward a moderate reduction in home sales and housing starts and a slowdown in price appreciation from the torrid performance of 2005.

We expect a significant pullback by investors and speculators to be a key part of the picture — along with greater discipline in the mortgage lending arena following the proliferation of “exotic” adjustable-rate mortgage loans in 2005.

Our forecasts show 6% to 7% declines in home sales and single-family housing starts in 2006, followed by smaller declines in 2007.

Multifamily starts hold up better in the forecast, despite inevitable production cutbacks in the condo market as the rental component shows positive growth in both years. Shipments of manufactured homes (HUD-code units) have surged in recent months, reflecting a large flow to the Gulf Coast region, and our forecast shows growth of about 12% in 2006 (year-over-year basis).

We’re also expecting ongoing growth in residential remodeling, partly in the post-hurricane rebuilding process. [return to top]

Want to Know Your State and Metro Forecasts for 2006?
Anticipate the trends, make better decisions and improve your bottom line. HousingEconomics.com, the online publication from NAHB Economics Group, is your single source for market analysis, forecasts, housing statistics and more. In-depth analysis and detailed Excel tables and overviews are available for all the state and metro forecasts.  

HousingEconomics.com combines unique scientific research with practical applications providing insights that are original and useful. This interactive Web site at the executive level provides critical data and information quickly, easily and frequently, and includes the following features:

  • Home Builders Forecast ― state, metro, non-residential, remodeling, etc.
  • Exclusive access to NAHB’s staff of economists
  • The Seiders' Report
  • Housing Market Statistics — 29 tables including housing starts, home prices, building permits, home sales, value of new construction, etc.
  • Housing Activity
  • In Depth-Analysis

For more details, visit www.housingeconomics.com. [return to top]

Attend the Spring Construction Forecast Conference in April
Plan to attend NAHB's Construction Forecast Conference on April 27 at the National Housing Center in Washington, D.C. The conference brings together the nation's premier housing economists and finance experts for an in-depth examination of the economic outlook for the housing industry. [return to top]

Give Us Your Perspective on the NAHB Economics Blog
Give your economic perspective on NAHB's economics blog, “Seiders on Housing,” an informal Internet-based forum dealing with economic issues, housing trends, survey research and other topics affecting the housing sector of the economy.

Log onto the blog at http://nahbblog.blogs.com and get direct access to NAHB Chief Economist David Seiders' expert opinions, projections and responses. Then let him know what you think. [return to top]

For more information or to contact us directly, please visit www.NAHB.org l ©2006, National Association of Home Builders

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