Concerns of both FOMC members and Fed staff centered on the deepening housing correction, housing “spillover effects” and persistent turmoil in financial markets. The unexpectedly weak employment report for December certainly has fueled concerns about the true condition of the U.S. economy.

The Fed presumably will set aside any concerns of latent inflationary pressures (associated partly with record high oil prices) and focus primarily on keeping the “real” economy afloat.

NAHB’s forecast currently assumes a half-point cut in both the federal funds rate target and the discount rate at the Jan. 30 FOMC meeting, followed by additional quarter-point cuts at the March 18 meeting — taking the funds rate to 3.5% and the discount rate to 4.0% by the end of the first quarter.

The Fed also will continue with the new Term Auction Facility as an efficient way to supply liquidity to depository institutions, through the discount window, and to improve the functioning of money markets — a prerequisite to normal functioning of other components of the credit markets. [return to top]
 

Housing market imbalances generated during the boom were corrected to some degree during the 2006-to-2007 housing downswing. To address flagging demand, many sellers of new and existing homes cut prices and offered a variety of non-price sales incentives. At the same time, median household income grew at a healthy rate ― about 5% per year.

As a result, house price-to-income ratios have fallen in most places and standard measures of affordability (incorporating prime mortgage market conditions) recently have been on the rise in all major regions of the country.

On the supply side of housing markets, builders have cut back dramatically on production of new housing units, dropping single-family starts by more than 50% from the cyclical high two years ago. These cutbacks have led to modest reductions in unsold inventories of new homes, and inventories also are off recent highs in the existing-home market.

In mortgage markets, the unsound practices that helped fuel the boom generally were weeded out during 2007, and we’re not looking for further tightening of mortgage lending conditions in 2008. Indeed, quality spreads within the market may very well narrow to some degree. [return to top]
 

First of all, we’re assuming that the Federal Reserve will manage monetary policy throughout the year to keep the economy out of recession, to maintain decent growth in employment and household income and to maintain historically low levels of prime conventional conforming mortgage rates.

We’re also assuming that a modernized FHA mortgage insurance program will grow nicely in 2008, filling a good part of the gap lift by shrinkage of the subprime market. With respect to outstanding subprime ARMs facing payment resets, we’re assuming good success from the “FHA Secure” program as well as from the private sector “Hope Now” program sponsored by the Bush Administration.

In addition, states should be given leeway to refinance subprime ARMs under the tax-exempt mortgage revenue bond program.

We also expect portfolio limits on Fannie Mae and Freddie Mac to be eased, giving the GSE’s more leeway to help refinance subprime ARMs. And an increase in the conforming loan limit, if implemented, will allow the GSEs to provide needed support to the market for prime “jumbo” mortgages — those above the current $417,000 limit. [return to top]
 

Indeed, NAHB’s current forecast shows a 20% decline in total housing starts this year, on the heels of an estimated 25% reduction in 2007.

While 2008 looks to be a down year (in total), we expect key turning points to occur within the year.

We’re looking for home sales to turn upward before mid-2008, on a national average basis, and we expect recoveries in housing starts and construction spending to commence before the end of the year.

As usual, housing market performance will vary considerably across states and metro areas, depending on fundamental economic conditions and differences in supply-demand relationships in geographically diverse housing markets.
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NAHB’s estimates of household formations, housing replacement needs and housing vacancies, including second homes, support a long-term forecast showing average annual housing starts of 1.85 million units over the next 10 years ― close to 2 million units including manufactured (HUD-code) homes. We currently expect to reach this level by 2011 or 2012, coming off the lows of 2008. [return to top]