The Seiders' Report: Monthly Overview of the U.S. Housing Industry
• Growth of real GDP has been revised upward for the second quarter. However, the pace still qualifies as slightly below trend and the composition of second-quarter GDP has sobering implications for the third quarter of the year.
• Below-trend rates of economic growth are in store for the balance of this year and most of 2007, although trend-like growth should be attained by 2008 (our short-term forecast now extends through 2008).
• Payroll employment growth has shifted to a lower pace as growth of economic output has slowed, and the unemployment rate is off its cyclical low in the second quarter of this year. Job growth should continue around recent rates for some time and the unemployment rate should move up somewhat further before receding over the latter part of our forecast horizon.
• Core inflation still is running above the upper bounds of the Federal Reserve’s implicit comfort zones, although recent news is reassuring and the core inflation measures still are being boosted by the perverse “owners’ equivalent rent” imputations that should be discounted by the Fed.
• Economic developments since the August 8 FOMC meeting, particularly further deterioration of housing market activity and reassuring news on core inflation, point toward another “no change” decision at the next FOMC meeting on September 20. We’re still expecting stable monetary policy through mid-2007, followed by a bit of monetary ease.
• Fixed-income markets have feasted on the news of a slowing economy, limited core inflation and rising prospects for stable short-term interest rates. Long-term bond and mortgage rates have come down quite a bit from their mid-year highs, and we’re expecting only slight increases in coming quarters.
• The housing downswing deepened in July as all major housing indicators lost ground. Furthermore, forward-looking surveys of builders and mortgage lenders point toward additional declines in single-family sales and housing starts in August, and large inventory overhangs of both new and existing units promise to weigh on both single-family and condo markets for some time.
• National average house price appreciation has slowed dramatically and is likely to be quite limited in the near term. The rate of nominal price appreciation should remain below trend for some time, and “true” house price appreciation will be even weaker.
• The current downswing in home sales and housing production should bottom out by the middle of 2007, although below-trend performances probably will run through most of 2008. These shortfalls from trend essentially compensate for the unsustainable above-trend performances of 2004 and 2005 as well as the weather-stimulated bounce in early 2006.
• The downswing in home sales and housing production will continue to detract from economic growth over the balance of this year and in the first half of 2007. However, stronger performances from other sectors, including nonresidential construction, should keep the overall economy on a solid growth path, and the mid-cycle sectoral rotation process may very well enhance the vitality of the economic expansion.
• The recent housing boom and the current downswing in housing market activity will have some adverse secondary impacts on the economy through consumer spending. However, neither a fading housing wealth effect nor a rising number of households subject to “payment shock” on adjustable-rate loans should be serious enough to derail the economic expansion.
• Our housing and economic outlook rests on a number of key conditions, and downside risks to the outlook are considerable. These risks include the possibility of spikes in interest rates or energy prices as well as large resales of homes back onto the markets by investor/speculators. There also are considerable uncertainties about the true dimensions of the risk facing homeowners with “exotic” ARMs, and there are major uncertainties regarding the size of the inventory overha
ng in the market for new homes.
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