Florida, Michigan, California, Nevada and Arizona have been hit hardest by the housing market decline, and only a few states and a small group of metro areas are showing an increased rate of housing production compared to 2005, according to a report by the chief economist for a builders’ trade group.
“The economic expansion has lost some momentum, and the slowdown in GDP growth is taking a toll on the labor market — due largely to the deepening housing contraction,” David Seiders, chief economist for the National Association of Home Builders, stated in his report, released last week.
The downturn in single-family housing activity “already is as serious as the recession-related downswing of the early 1990s, and our forecast suggests that the current contraction will serious challenge the early-1980s setback by the time the bottom of this housing cycle is reached around mid-2008.”
“Even so, the U.S. economy is not skating dangerously close to outright recession at this time and NAHB’s forecast says that recession will be avoided during the coming year.”
The cumulative declines from cyclical peaks in single-family housing starts and building-permit authorizations is approaching 50 percent, Seiders reported, and the annual rates for both starts and permits fell below the million-unit market for the first time since 1995.
Also, a measure of builder confidence in the housing market — the NAHB/Wells Fargo Housing Market Index — dropped to the lowest level this month in the 22-year history of the index, and has fallen for eight consecutive months. The index score was 18 for this month, and a score of less than 50 indicates that more builders view sales conditions as poor than good.
While builders have slashed new-home production, “inventories of new homes for sale are hardly off their 2006 highs and the months’ supply actually has moved up to a cyclical high,” Seiders stated in the report. The month’s supply of new homes for sale reached 8.2 in August, based on the sales rate for that month.
Credit conditions “generally remain tighter than before the crisis” that erupted in the mortgage market in early August, Seiders stated, “particularly in subprime, alt-A and jumbo loan components of the home mortgage market.”
Builders have reported some success in cutting prices to boost sales, according to the report. “About half the companies report that the price cuts have been at least somewhat effective in bolstering sales and limiting cancellations, and some companies are planning large price cuts for short time frames as they attempt to jump-start the markets.”
The likelihood that home-price declines and mortgage-market problems will impact consumer spending “should encourage the Federal Reserve to ease monetary policy further before the end of the year, and we expect the Fed to maintain a stimulative policy stance in 2008,” Seiders stated.
The NAHB housing-market forecast has been trimmed in the past month “although we still anticipate a trough for home sales early next year, a trough for housing starts around mid-year, and a trough for residential fixed investment in the third quarter of 2008.”
“A lot has to go right for this forecast to be achieved, including skillful management of monetary policy by the Federal Reserve, maintenance of solid growth in personal income and employment, a manageable wave of home mortgage foreclosures, and better performance of mortgage markets going forward,” Seiders reported.
And even if the market does move forward as expected, “the severity of the current contraction in the single-family housing market will challenge the episode of the early 1980s” that stemmed from rising inflation.
Low employment growth is expected well into 2008, Seiders reported, accompanied by a slight rise in the unemployment rate.
“The systematic slowing of payroll employment growth since 2005 can be pinned largely on declining employment in residential construction and closely related industries — including the beleaguered housing finance system,” Seiders reported.
“Everything considered, the housing contraction now is costing the economy roughly 60 thousand jobs per month, and there’s certainly more to come.”
The dust is settling on the mortgage liquidity crisis, and “credit market conditions will not return to pre-crisis conditions for quite a while (if ever),” according to Seiders. The securities market for nonprime adjustable-rate mortgages are expected to “struggle mightily for a long time.”
The inventory of new homes for sale, coupled with the inventory of vacant previously owned homes on the market, “will hold down housing starts for some time beyond the trough in home sales,” according to the Seiders report.
If home sales bottom-out in first-quarter 2008 and housing starts hit a low in mid-2008, residential fixed investment should cease to be a drag on the gross domestic product by the close of 2008, the report states.
Seiders states in his report that there is a good case for the Fed to cut rates further before the end of the year. “After all, the housing contraction actually has gained downward momentum recently; credit costs for the majority of private-sector borrowers remain higher than in July; and core consumer price inflation is quite benign — despite hefty increases in oil prices and a sliding dollar.
“We still expect quarter-point cuts in both federal funds and discount rates at both the Oct. 30-31 and Dec. 11 FOMC meetings. We’re also assuming the Fed will hold those rates during all or most of 2008 before extracting some monetary stimulus as the economy clearly emerges from the woods.”
