August 29, 2007
By David F. Seiders
NAHB Chief Economist
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The Overall Economy Still Is Performing Well Despite the Major Housing Correction
Growth of U.S. economic output (real GDP) slipped badly in the first quarter of this year but rebounded nicely in the second quarter. Third-quarter growth should be around the average for the first half of the year, according to momentum at mid-year and available monthly data for July, and that’s not bad at all.

The housing production component of GDP (Residential Fixed Investment) contracted substantially in the first half of the year, and an even larger contraction is in the cards for the third quarter.

Fortunately, other major components of the U.S. economy have been performing well — including consumer spending, nonresidential fixed investment (including nonresidential structures) and the export market.

Forward momentum in these parts of the economy, along with some support from the government sector, should keep the economy out of recession this year — despite the deepening housing downswing. We currently peg the probability of recession at around 33% toward the end of this year.


Financial Market Turmoil Forces the Fed’s Hand
The Fed held monetary policy steady at the Aug. 7 meeting of the Federal Open Market Committee (FOMC) and continued to say that inflation poses the biggest risk to the U.S. economy going forward.

The FOMC statement did say that “credit conditions have become tighter for some households and businesses,” but the statement expressed the judgment that economic growth would continue at a moderate pace in coming quarters.

Financial market conditions deteriorated markedly in the wake of the Aug. 7 FOMC meeting, forcing the Fed to inject large amounts of reserves into the banking system just to keep the effective federal funds rate close to the unchanged target rate — 5.25%.

In the midst of this turmoil, the Fed issued a public statement on Aug. 10 saying that the central bank would continue to keep the funds rate on target and reminding the markets of the existence of the discount window that banks could go to for credit (at a 1% penalty rate).

The Fed’s words and actions at this stage of the game prompted many analysts and market participants to charge that the Fed under Chairman Ben Bernanke was “out to lunch” in the midst of an evolving financial market crisis.

Market turmoil increased further in following days, and on Aug. 17 the Fed turned more decisive — announcing a half-point cut in the cost of primary credit at the discount window and amending the balance-of-risk statement that had been issued at the conclusion of the Aug. 7 FOMC meeting.

The revised statement focused on the downside risks to economic growth and dropped the long-standing inflation concern. [return to top]

Monetary Policy Will Be Eased Before Long
The revised FOMC statement paves the way for a cut in the federal funds rate target to be made at or before the next FOMC meeting on Sept. 18. NAHB’s forecast now assumes quarter-point cuts at both the Sept. 18 and Oct. 31 meetings, and an additional cut at the Dec. 11 meeting is not out of the question.

The projected easing of monetary policy is sorely needed since the recent market turmoil has tightened overall financial market conditions as investors have stampeded toward credit quality. This process has driven down risk-free interest rates (i.e., Treasury rates) but widened quality spreads in virtually all private markets — raising credit costs for all but the best credit risks.

The mortgage market has been hardest hit, but the cost of funds for all but AAA-rated businesses has climbed as well. [return to top]

Mortgage Market Turmoil Weighs Heavily on Prospective Home Buyers
The meltdown of the subprime mortgage market and evolving evidence of credit problems in other components of the U.S. mortgage market have prompted a dramatic tightening of mortgage market conditions.

Mortgage rates have risen substantially in subprime, Alt-A and jumbo loan components (above the GSE conforming loan limit), and serious availability problems have erupted as corresponding components of the mortgage-backed securities markets have frozen up.

Adjustable-rate mortgages now are quite rare in these components of the mortgage market, and the only segments now operating “normally” are the small FHA and VA markets (with Ginnie Mae securities backup) and the prime conventional conforming market that’s served by Fannie Mae and Freddie Mac.

These markets accounted for about half of total mortgage originations in 2006, and the shares now are rising substantially. [return to top]

And Mortgage Markets Are Delivering Heavy Hits to Builders...
NAHB is surveying builders intensively about the impacts of recent mortgage market turmoil on home sales as well as sales cancellations.

We’ve been surveying builders on these topics since early this year, when the subprime market started to melt down, and it’s clear that the tightening wave that hit during the past month has had the most severe impacts so far.

Our current survey shows that the most recent wave of credit tightening has had adverse impacts on home sales at nearly two-thirds of single-family builders, with the heaviest impacts on large companies in the West.

Furthermore, the credit problems have pushed up sales cancellations at more than one-third of the companies, particularly for big builders in the West.

When asked about credit problems in various components of the mortgage market, the builders ranked degrees of seriousness as follows ― subprime, Alt-A, prime jumbo and prime conforming.

On the other side of the coin, one-fifth of survey respondents said FHA-insured mortgages are helping to fill the gaps and one-eighth said VA-guaranteed loans are filling in to some degree. [return to top]

Extending and Deepening the Housing Downswing
The extreme volatility in financial markets and the most recent round of tightening in mortgage market conditions have prompted yet another downward revision to NAHB’s forecast of housing market activity for the balance of 2007 and 2008.

Compared with forecasts put in place at the beginning of this year — before the mortgage market meltdown began during the first quarter ― our forecasts for total housing starts in 2007 and 2008 now are lower by 11% and 24%, respectively.

In historical terms, we now figure that housing starts for 2008 — 1.3 million will be the lowest since 1993. Our revised housing forecast definitely has troubling implications for the economic expansion.

The projected downswing in Residential Fixed Investment takes a heavy toll on GDP growth in the second half of this year, subtracting about a percentage point in both the third and fourth quarters. The drag from housing eases off during the first half of 2008, and we expect RFI to resume slow positive growth during the second half.

But as I’ve been saying all year, our baseline (most probable) housing forecasts still are surrounded by wide bands of uncertainty. [return to top]

Attend the Fall Construction Forecast Conference in October
Plan to attend NAHB's Construction Forecast Conference on Oct. 24 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.

Register by Sept. 7 and save $50 off the regular registration fee.

For more information, visit

  [return to top]

Want to Know the Housing Forecast for the Top 100 Metros?
Find out in’s 2007-2008 Metro Forecast (free preview ). Get the metro forecast with in-depth analysis, overviews and downloadable Excel tables.

To learn more, visit [return to top]

For more information or to contact us directly, please visit l ©2007, National Association of Home Builders

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