The slowdown in housing has begun to take a toll on the overall economy according to the November Economic Outlook issued by Freddie Mac on November 8.

According to the latest version of the report which is issued early each month by the Office of the Chief Economist, the cooling of the housing market knocked 1.1 percent off the rate of real Gross Domestic Profit growth during the third quarter of the year, largely through a 17 percent decline in residential fixed investment. This resulted in the lowest annualized growth, 1.6 percent, in any of the past three years. The good news, according to Freddie, is that this is helping to offset inflationary pressures created by a tightening job market.

The drop in energy prices is also contributing to keeping inflation under control and corporate profit margins which are at post-war highs (they didn't specify which war so we assume WWII) are allowing companies to absorb modestly rising labor costs without necessarily raising consumer prices.

Freddie sees a continued moderation in consumer price inflation and has lowered its prediction for the fourth quarter to 1.0 percent from the 1.5 percent forecast in October. The unemployment projection for the fourth quarter has been lowered by 30 basis points to 4.5 percent because of a spurt of 470,000 new jobs created from August to October this year.

The Forecast is holding firm on its projection that 30-year fixed rate mortgages will average 6.5 percent this year and will hold steady at that rate through 2007. The 10-year and 1-year Treasury rates are predicted to average 4.9 and 5.1 percent respectively.

The past month recorded the largest discount rate on ARMs in six years (2.2 percent) due to the flat yield curve but the share of mortgage loans attributable to ARMs will probably decrease from an average of 21 percent this year to 14 percent in 2007 as the flat yield curve between short and long-term rates will push more borrowers to choose the fixed-rate products.

Housing starts will continue to decline but will bottom out early next year, settling at 1.62 million units in 2007 while the estimate of total home sales in the fourth quarter of this year has been downgraded from the October projection by an annual rate of 20,000 units. The total for the year is now expected to be 6.71 million units.

Market activity is showing further weaknesses in the prices of both new and existing homes and the Forecast for November cut Freddie Mac's estimate of home price growth for the third quarter by nearly 2 percent since last month. The annual appreciation rate is now projected at 3.5 percent for the year and is, furthermore, expected to decline to 2.9 percent in the early part of next year but it is expected to rise to an average of 3.3 percent for all of 2007.

Refinancing continues to be a strong contributor to overall mortgage activity, largely because of incentives to for cash-out refinancing and because borrowers are seeking to get out of ARMs before being caught by damaging rate hikes. Refinancing is expected to average 44 percent of all mortgage activities during the last quarter of 2006 and the first of 2007.