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

Highlights

• GDP growth has been revised up a bit for the first quarter and second-quarter growth most likely will remain slightly positive despite major negative impacts from residential fixed investment. As expected, foreign trade now is buoying the U.S. economy while other key sectors are losing ground.
  
  
• The rebates of personal income taxes presumably are providing some support to consumer spending at this time, but record-high costs of food and energy are acting like taxes on consumers and measures of consumer confidence/sentiment are in recession-like territory. Real consumer spending most likely will post a small gain the second quarter, similar to the weak first-quarter performance, although considerable uncertainties surround that expectation.
  
  
• The probability of outright economic recession in 2008 has slipped back below 50%, and it’s now more likely that the U.S. economy is involved in a “growth recession” characterized by below-trend GDP growth and a deteriorating labor market. This condition is likely to persist throughout the balance of this year.
  
  
• Surging prices for food and energy have been putting strong upward pressure on headline inflation but key measures of core consumer price inflation have been well-behaved so far. Rising commodity prices are bound to feed through to core inflation to some degree, although we expect core inflation rates to recede by late this year.
  
  
• The Federal Reserve has telegraphed an end to its rate-cutting campaign, and we now expect the Fed to maintain the current stimulative monetary stance at the next FOMC meeting late this month. We also expect the Fed to hold steady until early next year, contrary to expectations for rate increases that are embedded in futures market pricing.
  
  
• Treasury rates have risen considerably since mid-March as the global stampede to credit quality has subsided to some degree, and spreads to Treasury of many private borrowing rates (including prime home mortgage rates) have narrowed to some degree in the process. Long-term Treasury and home mortgage rates should remain close to current levels for some time.
  
  
• Official monthly data on home sales and housing inventory are notoriously deficient, although supplementary quarterly data on housing vacancies along with NAHB’s estimates of net sales at large builders help document a worsening imbalance between available supply and effective demand in the homeowner market. A rising tide of foreclosures is adding to the inventory overhang despite aggressive efforts by lenders to unload REO in short order.
  
  
• The increasingly serious supply-demand imbalance is putting strong downward pressure on national average home prices, and prices have been falling substantially in recent times — according to the best available repeat-sales price measures. Indeed, average prices started to fall around the middle of 2006, the average was down 15.6% by the first quarter, and the seasonally adjusted annual rate of decline exceeded 20% in the first quarter.
  
  
• Falling house prices, growing household income and receding mortgage rates have substantially boosted standard measures of housing affordability from the lows of 2006. But home sales are being held down largely by consumer expectations of further price declines and by tightening of non-rate mortgage lending standards.
  
  
• NAHB’s forecast shows stabilization of home sales around the middle of this year followed by decent recovery over the balance of the 2008-2009 forecast horizon. But temporary tax credits for home buyers may very well be needed to get sales off the deck this year, and the Congress is working toward this type of stimulus along with measures to improve housing finance and stem the upswing in mortgage foreclosures.
  
  
• NAHB’s forecast of housing production show a shift in composition of housing starts from the multifamily sector to the single-family market. Worsening supply-demand fundamentals have prompted downward revisions to all three components of multifamily — market-rate rentals, subsidized rentals, and for-sale condos and co-ops.
  
  
• The changes in the structure of housing starts softens the projected downswing in residential fixed investment to some degree, although housing production continues to exert a serious drag on GDP growth into the early part of next year.

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