The housing production component of GDP (residential fixed investment) contracted at a 22.8% annual rate in the fourth quarter and knocked 0.8 of a percentage point from the overall GDP growth rate — quite a negative contribution from a component that now accounts for less than 3% of total GDP.

Consumer spending, which now accounts for 71% of the total, contracted at a 4.3% annual rate in the fourth quarter and registered a negative growth “contribution” of -3.0 percentage points — an extremely large drag from this part of the economy. Consumer spending rarely goes negative.

Consumer spending apparently stopped falling in the early part of this year, but serious weakness in other sectors of the economy apparently kept real GDP in free fall during the first quarter. We’re estimating -5.2%.

Residential fixed investment probably contracted at nearly a 40% pace — we’re looking for a major downshift in nonresidential fixed investment (structures as well as capital equipment and software) — and businesses undoubtedly cut inventory positions considerably in the first quarter.

Spending by state and local governments inevitably lost ground as well.

The rate of decline in real GDP should slow considerably in the second quarter — we’re estimating -2.0% — as the cutback in business inventories abates and the drag from housing lightens a bit.

We expect real GDP to stabilize around mid-year and to post modest (below-trend) growth in the second half of this year.

The GDP recovery should gather momentum during 2010, with above-trend growth emerging by the second quarter. If this pattern materializes, a significant run of self-sustaining above-trend growth will be in store for 2011 and beyond.
 

We’re expecting net payroll job losses over the balance of this year and possibly into the early part of 2010.

We currently expect payroll employment to flatten out in the first quarter of next year and to show decent growth during the second half of the year.

The civilian unemployment rate is destined to rise by about another percentage point from 8.5% reported in March.

We expect this rate to top out at 9.4%, on a monthly average basis, during the first half of 2010, not far below the peak reached in the wake of the double-dip recession in the early 1980s. The projected pace of the GDP recovery during 2010 drops the unemployment rate to 9.0% by late in the year, leaving plenty of labor market slack to support above-trend GDP growth for quite a while into the future. [return to top]
 

The spread between the prime conventional conforming FRM rate and the 10-year Treasury rate widened out considerably last year when Fannie and Freddie were spurting red ink and their future was highly in doubt. The spread improved to some degree after federal authorities seized the government-sponsored enterprises (GSEs), placed them under federal conservatorship and affirmed the quality of their debt and guaranteed mortgage-backed securities.

The Federal Reserve clearly wants to drive mortgage rates down further, and our central bank has committed to buy large amounts of GSE debt as well as mortgage-backed securities guaranteed by Fannie, Freddie and Ginnie Mae in order to accomplish that feat.

The Fed also is buying longer-term Treasury instruments in an attempt to drive down mortgage rates and other private yields along with Treasuries.

NAHB’s forecast assumes that the Fed will have some success in lowering long-term Treasury rates in coming quarters and that the spread between the FRM rate and the 10-year Treasury rate will narrow systematically over the short-term forecast horizon.

We expect the prime conventional conforming FRM to hover around 4.7% for much of this year. [return to top]
 

The University of Michigan regularly asks consumers whether they think it’s a good or bad time to buy a house. The proportion saying “good” has been around 70% in recent months, including March, well up from the cyclical lows posted back in 2006.

The rebound in perceptions of home buying conditions has been driven primarily by lower house prices, but also by lower mortgage rates.

Weak assessments of general economic conditions obviously have been holding back prospective buyers who view house prices and interest rates as favorable.

In March, none of the consumers who rated home buying conditions as “good” cited “good times” as a reason, while a significant number of those saying it was a bad time to buy a house listed “bad times ahead” as a factor.

In previous cycles, home sales ordinarily started up before employment and consumer confidence rose, generally because low mortgage rates and enhanced affordability encouraged some pent-up demand to come onto the market early in the game.

That dynamic hopefully is coming into play at this time, supplemented by the appeal of the temporary $8,000 tax credit for first-time home buyers. [return to top]
 

NAHB’s proprietary survey of large public and private single-family builders, accounting for roughly one-fourth of the national for-sale market, suggests that seasonally adjusted gross sales (new orders) flattened out in the first quarter and that net sales for the first quarter were somewhat above the fourth-quarter pace.

Furthermore, a strong downtrend in cancellations has produced some recent improvements in cancellation rates, measured relative to current gross sales or to the backlog of signed sales contracts in the hands of builders.

NAHB’s broad-based single-family Housing Market Index (HMI), based on monthly surveys of about 400 companies of all sizes, had been mired in a record-low and narrow range from last November through March of this year.

However, the HMI moved from 9 to 14 in April and improvements were registered for all three components (current sales, buyer traffic and sales expectations) and in all four regions of the country.

While one month certainly doesn’t make a trend, the signals provided by the April HMI definitely are welcome. [return to top]
 

Data on housing starts and building permits through March have bolstered our view that total and single-family housing starts will bottom out in the second quarter of this year, although the multifamily sector is not likely to stabilize until the end of the year.

We expect both single-family and multifamily starts to gain ground during 2010, although constraints on housing production credit will undoubtedly limit the gains — particularly in the multifamily sector.

Residential fixed investment (RFI), which includes manufactured home shipments, brokers’ commissions and improvements to structures as well as the production of new single-family and multifamily units, should continue to exert a drag on GDP growth over the balance of this year — although the drag most likely will be lessening as the year progresses.

We expect RFI to post positive growth throughout 2010, helping to lift GDP growth into a healthy range by mid-year. [return to top]
 

However, the coming economic expansion figures to be less robust than usual, due to two structural “headwinds” — tighter credit conditions with less financial leveraging in national and global systems; and less aggressive consumer spending as heavily damaged household net worth and reduced prospects for capital gains encourage more saving out of current income.

Both of these headwinds are blowing now, won’t subside for some time and will inevitably hold back the housing recovery.

Credit conditions for both home buyers and housing producers will be much tougher than during the unsustainable boom period earlier this decade.

Furthermore, the recent wrenching experience with falling home prices and widespread foreclosures is bound to keep some downward pressure on the homeownership rate and to encourage consumers to put less of their resources into housing — unless housing policy enhancements work against these forces. [return to top]
 

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To learn more, visit www.housingeconomics.com. [return to top]