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November 29, 2006
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By David F. Seiders
NAHB Chief Economist |
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Third-Quarter Economic Growth Revised Upward Despite a Weaker Housing Component
Growth of real gross domestic product (GDP) for the third quarter of this year has been revised upward by the Commerce Department — to a 2.2% pace from 1.6% in the “advance” estimate. The revised growth rate still qualifies as a sub-par performance, and a similar reading is in the cards for the final quarter of 2006 ― we’re estimating 2.4%.
The housing production
component (Residential Fixed Investment) was the weakest part of the revised
third-quarter GDP report, contracting at an 18% annual rate and lopping off
1.16 percentage points from the overall GDP growth rate.
Another sizeable contraction in RFI is in the cards
for the fourth quarter of this year, but the drag on economic growth should
ease off during the early part of next year and housing should provide positive
contributions to growth beyond mid-year.
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Financial Markets Provide a Favorable Environment for Housing Going Forward
The convincing slowdown in
economic growth has encouraged the Federal Reserve to hold short-term interest
rates steady since mid-year, despite elevated readings on core consumer price inflation.
Recent statements from Fed representatives, including Fed Chairman Ben Bernanke,
strongly suggest that monetary policy will be held steady at the next meeting
of the Federal Open Market Committee (Dec. 12). NAHB’s forecast assumes that
the Fed will maintain the current federal funds rate target (5.25%) through the
first half of next year before implementing a bit of monetary ease.
Long-term interest rates have receded as the economy
has slowed and probabilities of near-term Fed tightening have been marked down.
Indeed, the long-term home mortgage rate recently slipped below 6.2%, the same
as at the beginning of this year and not far above the cyclical low at
mid-2005. NAHB’s forecast shows only slight upward pressure on long-term rates
during the coming year. [return to top]
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Home Sales Are Stabilizing Following a Substantial Correction
Sales of new and existing homes
(including condo units) soared to unsustainable heights during 2005, and
substantial downward corrections have been recorded since then. However, recent
data strongly suggest that the downswing in sales hit bottom recently, at least
for single-family homes, and we are now expecting sales to show some
improvement by the first quarter of 2007.
Sales of new single-family
homes slipped a bit in October (preliminary estimate) although the pace was
equivalent to the average for the third quarter — suggesting that the abrupt
downshift from the mid-2005 record is now behind us. Sales of existing
single-family homes actually edged up in October and stood a bit above the
third-quarter average, while sales of existing condo units continued downward
in October.
Timely survey data reinforce
the sales stabilization pattern and point toward some improvements before long.
NAHB’s single-family Housing
Market Index bottomed out in September and recorded slight increase in both
October and November — primarily reflecting a pickup in builders’ sales
expectations. Furthermore, applications for mortgages to buy homes (Mortgage Bankers
Association series) have been essentially stable since July following a
major downshift during the previous year. [return to top]
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But Inventory Overhangs Remain Quite Heavy
Although home sales are
stabilizing, inventory overhangs still are quite heavy in the markets for both
new and existing housing.
Inventories of new single-family
homes for sale still are close to record levels, the inventory of completed new
homes is at a new record, and the overall inventory-to-sales ratio was at a
historically high seven months at the end of October — equivalent to the
third-quarter average.
In the market for existing
single-family homes, the unsold inventory is hanging around the record level
reached in July and the months’ supply is stubbornly high.
Inventories of existing condo units still are climbing
to higher and higher records, and the months supply was up to 9.1 October.
[return to top]
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And Home Prices Remain Under Downward Pressure
The inventory overhangs show
that “buyers’ market” conditions still prevail in new and existing housing
markets, and sellers have been under heavy pressure to lower prices in order to
sell homes.
The median sales price for
existing single-family homes was down by 3.4% in October (year-over-year basis)
following smaller declines in August and September. The median sales price for
existing condo units also has been falling for several months and was down by
5.3% in October (year-over-year). The median sales price for new single-family homes
posted a 1.9% advance in October (year-over-year) but that series is plagued by
thin sampling, compositional shifts and distortions caused by non-price sales
incentives provided by builders. NAHB’s surveys show that nearly half of
single-family builders were cutting prices in November, by an average of 8%,
and a large majority of builders were providing non-price incentives that
support both sales and prices (i.e., sales prices would be lower in the absence
of the incentives). [return to top]
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Inventory and Price Trends Prompt Builders to Cut Back New Production
The pronounced fall-off in
buyer demand, the large buildup of unsold inventory and the weakness of home prices
have prompted builders to not only intensity sales efforts, but also to cut
back on starts of new units and acquisition of new building permits.
Total housing starts fell by
nearly 15% in October, reflecting large cutbacks in both single-family and
multifamily markets, and permit issuance was off substantially as well. Indeed,
single-family starts and permits were both down by 32% from a year earlier.
We expect housing starts to
continue downward into the early part of 2007, despite an earlier stabilization
of sales, as builders continue to work down unsold inventory. We are now expecting starts to begin inching upward in
the second quarter of next year, and that turnaround should relieve the drag on
GDP from Residential Fixed Investment by the second half of 2007 — pretty much
in line with the Fed’s expectations.
[return to top]
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 Find out in HousingEconomics.com’s Long-Term Forecast. For a free sample, click here.
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For more details, visit www.housingeconomics.com. [return to top]
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or to contact us directly, please visit www.NAHB.org
l ©2006, National Association of Home Builders |
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