Housing Economics - 02/20/2008 (Plain Text Version)
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E-mail Our Editor In this issue: The Seiders' Report: A Housing Overview by the NAHB's Chief EconomistHighlights • Signs of economic weakness have proliferated during the past month, and it’s clear that rates of growth in U.S. economic output (real GDP) and payroll employment have shifted downward since the fall of last year. The dramatic downward correction in the housing sector still is underway and support from other key sectors recently has weakened —leaving the overall economy in tenuous condition. • The recent downshift in economic activity has provoked widespread discussion about the chances for near-term economic recession in the U.S.; indeed, some analysts contend that the economy already is in the red zone. NAHB’s forecast shows a dangerous slowdown in GDP growth during the first half of 2008, accompanied by further deterioration of the labor market, but we believe that well-timed monetary and fiscal stimulus will help keep the economy moving forward. • The credit market turmoil that erupted last summer and contributed to the recent downshift in economic activity still is a major problem for the U.S. economy. The severe liquidity problems in short-term credit markets have eased since the end of 2007, thanks in part to the Federal Reserve’s new discount window procedures. But other components of financial markets, including the corporate bond and equity markets, still are under considerable strain. • The home mortgage market still is a mixed bag. Persistent downward pressure on the Treasury yield curve has contributed to recent declines in rates on FHA/VA mortgages as well as on prime conventional conforming loans, while rates on prime jumbo loans remain at elevated levels and both the subprime and Alt-A markets are virtually dead in the water. Fixed-rate mortgages have regained dominant market share in the process, and deep discounting of initial ARM rates is a thing of the past. • The staggering economy and persistent strains in credit markets have prompted major changes in the signals emanating from our central bank. Fed Chairman Bernanke recently said that additional easing of monetary policy “may well be necessary,” he committed to “substantive additional action as needed to support growth and to provide adequate insurance against downside risks,” and he said the Fed is prepared to “counter any adverse dynamics that might threaten economic or financial stability.” • “Adverse dynamics” emerged on January 21 as stock markets tumbled abroad and futures markets signaled impending damage to U.S. equity markets. So early in the morning of January 22, the Fed announced 75 basis point cuts to both the federal funds rate and the discount rate. These definitely were “emergency” cuts, enacted only 8 days before the next regularly scheduled FOMC meeting, and the Fed signaled intentions to enact further rate cuts in the near future. • Chairman Bernanke recently endorsed short-term fiscal stimulus to complement monetary policy and help the economy through the current danger zone, and both Congressional leaders and the White House have come out in favor of some sort of stimulus package. The key parties appear to agree that fiscal stimulus should be timely, temporary, cost-effective and large enough to make a real difference, although appropriate targeting and other issues are sure to arise as negotiations proceed. • It would make a great deal of sense to include a housing provision in a short-term fiscal stimulus package, and a temporary tax credit for home buyers definitely would revive flagging home sales and reduce the heavy inventory overhang that currently weighs on house prices and housing production. Longer-term housing policy enhancements also are needed at this time, including enactment of FHA modernization legislation and an increase in the GSE conforming loan limit from the current $417 thousand. • Recent housing indicators crystallize the need for immediate policy stimulus. Sales of new homes plummeted in November, single-family housing starts and permits continued to sink in December, and NAHB’s surveys of single-family builders show deterioration of net sales through the end of 2007 and extremely low levels of builder confidence through January of this year. • NAHB’s builder surveys also show widespread and expanding use of price adjustments and nonprice incentives to bolster sales and limit cancellations. However, builders generally report only limited success on these fronts, despite improvements in standard measures of housing affordability. Consumer surveys actually show improving sentiment about home buying conditions, but these surveys also show deteriorating sentiment about home selling conditions—discouraging activity in the crucial trade-up market. • NAHB’s baseline (most probable) housing forecast shows a cyclical bottom for home sales by mid-2008 and the beginnings of recovery in housing production before the end of the year. However, this forecast now assumes aggressive monetary stimulus, lower prime conventional conforming mortgage rates, timely enactment of short-term fiscal stimulus, and key policy enhancements to the housing finance system. Needless to say, there are substantial downside risks to our housing forecast at this time. Please note: This information is available only to HousingEconomics.com subscribers. Download free Samples. For more information or to contact us directly, please visit www.NAHB.org | ©2008, National Association of Home Builders |