The Seiders' Report: A Housing Overview by the NAHB's Chief Economist

Highlights

 • Falling house prices pose a huge risk to the U.S. economy and to the financial markets. Falling prices decimate the quality of outstanding mortgages (whole loans and securities structures), leading to progressive tightening of lending standards in primary mortgage markets.  This tightening process further weakens effective homebuyer demand while falling mortgage quality feeds the upswing in foreclosures that dumps more supply onto glutted markets —putting more downward pressure on house prices from both directions.

•  NAHB’s baseline (most probable) forecast now incorporates a mild economic recession in the first half of 2008. Incoming economic data still are a mixed bag, however, and it will be some time before the Business Cycle Dating Committee at the National Bureau of Economic Research decides whether or not the current economic situation qualifies as an “official” recession for the U.S. economy.

• Real Gross Domestic Product (GDP) grew at a meager 0.6% annual rate in the first quarter of this year, according to the “advance” estimate released by the Commerce Department on April 30. This equaled the “final” estimate for the fourth quarter of 2007, although the composition of first-quarter GDP was much less favorable —with final sales contracting and business inventories rising. These movements suggest that negative GDP growth is likely to emerge in the second quarter of the year.

• Economic weakness is clearly evident in the labor market. Private sector payroll employment started down last December and the cumulative loss through April came to 312,000 thousand jobs. Total payroll employment (including the public sector) started down in January and now is down by 184,000 thousand jobs. The civilian unemployment rate (from the household survey) was up to 5% in April, from a low of 4.4% in March 2007.

• The housing contraction has continued unabated, laying heavy hits on both GDP and the labor market. Residential Fixed Investment contracted at a 26.7% annual rate in the first quarter and lopped 1.23 percentage points off the GDP growth rate —essentially the same as the dismal performance in the final quarter of 2007. Employment in residential construction (builders and specialty trade contractors) continued to move downward through April, recording a loss of 33,100 jobs for the month and a cumulative loss of 477,900 thousand from the peak in early 2006.

• The geographic scope of the housing contraction has expanded as the national downswing has deepened. All states now show declines in single-family permit issuance since the national peak in the fall of 2005, and only a few (mostly small) metro areas still are in the positive zone. The deepest declines are being recorded in previously overheated areas (including Florida, California, Arizona and Nevada) as well as in areas with fundamentally weak economies (including Michigan, Minnesota, Illinois and Ohio).

• Oil prices recently surged to record highs (in both nominal and real terms), food prices have been rising rapidly, and the weakening dollar has been delivering an inflationary impulse via import prices. But key measures of core consumer price inflation (excluding direct energy and food prices) have been well behaved, largely because the weakening job market has held down unit labor costs.

• The Federal Reserve enacted quarter-point cuts in both the federal funds and discount rates at the conclusion of the April 29-30 meeting of the Federal Open Market Committee (FOMC), citing “subdued” spending by households and businesses and softening labor markets. Looking forward, the FOMC statement said that “tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters.”  The statement also said the FOMC “expects inflation to moderate in coming quarters.” These judgments are fully consistent with NAHB’s macroeconomic forecasts.

• Measures of Consumer Confidence (Conference Board) and Consumer Sentiment (University of Michigan) recently plummeted into recession-like territory, with negative implications for discretionary spending on items such as autos and housing. Furthermore, NAHB’s measure of builder sentiment (the single-family Housing Market Index) remained deeply depressed through April, pointing toward further erosion of new-home sales in coming months due to the reluctance (or inability) of prospective buyers to move across the line.

• The supply-demand imbalance in housing markets actually appears to be worsening, as profoundly weak demand is coupled with rising numbers of vacant year-round housing units on the market —both for sale and for rent. The heavy excess supply naturally is putting strong downward pressure on house prices, reviving standard measures of housing affordability but also supporting expectations of further price declines and apparently boosting the perceived user cost of capital.

• The diabolical “feedback loops” in the housing and housing finance markets make it extremely difficult to craft forecasts of housing market activity for the balance of this year and in 2009. NAHB’s current forecast shows very large declines in new-home sales and housing starts in 2008, with only modest recovery in 2009. In this forecast, Residential Fixed Investment exerts a heavy drag on GDP growth throughout 2008 and doesn’t deliver meaningful support to the economy until the second half of 2009.

• NAHB’s downbeat housing forecast actually is subject to considerable downside risk. The Federal Reserve would like to break up the feedback loops that are dragging housing downward, but the Fed apparently lacks the tools necessary to do the job. A fiscal policy solution is sorely needed to spur home buying, stem the upswing in foreclosures and cushion the downdraft in house prices. There’s a lot of activity on these fronts, in both the Senate and the House, and the President would be hard-pressed to veto well-structured legislation to help current homeowners and to help stem the housing contraction. Stay tuned!

 Full Report

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