Three major housing-related economic reports and forecasts
were issued this past week. Each looked at a different sector and reported results
varying from sort-of- ebullient to not-exactly-grim. All three, however, agreed
that the halcyon days for the building, real estate, and mortgage industries
are probably coming to an end.
The most upbeat report came out of the Office of the Chief Economist of Freddie
Mac. The December forecast was, for the first time since late summer, almost
able to ignore the effects of Hurricane Katrina on the economy. Among the notable
- The Bureau of Economic Analysis has revised its third quarter estimate of
growth in the Gross Domestic Product (GDP) from 3.8 to 4.3 percent.
Freddie Mac has correspondingly revised its estimate to 3.8 percent for the
quarter and the year.
- Consumer confidence, possibly in response to dropping fuel costs
(a trend more recently reversed) and an improving job market has returned
to August levels.
- The first week of the holiday shopping season was, according to
retailers, the second best in the last six years.
- Construction did particularly well in as a factor of job growth,
posting 37,000 new jobs during the month (some Hurricane related jobs) and
construction set a record for the fourth straight month at 1.13 trillion in
work when seasonally adjusted.
The report forecasts that rates for fixed-rate mortgages and ARMS will be up
slightly from projections last month. The 30 year fixed rate mortgage is expected
to average 6.5 percent (compared to the 6.4 percent forecast last month) in
2006 and rates for the 1-year ARM are expected to average 5.5 percent. The flattening
yield curve as the Federal Reserve continues to hike the federal funds rate
is expected to reduce the popularity of adjustable rate mortgages, particularly
the longer term 7/1 and 10/1 hybrid loans.
The report states that housing starts and total home
sales will both decline over the next year or so. Housing starts, which
are expected to set a record at 2.05 million units this year, will fall to around
1.90 million next year while sales will drop from an anticipated 7.5 million
units - a third consecutive record - in 2005 to 7.1 million in 2006.
Mortgage loan activity, expected to total near 2.9 trillion
this year, will drop to $2.5 trillion next year, largely due to a 40 percent
drop in refinancing to a 28 percent share of all activity. Refinancing has been
a major thrust of the mortgage business, consistently providing well over 40
percent of the market over the last few years.
Freddie Mac released another report earlier in the week; its quarterly Convertible
Mortgage Home Price Index (CMHPI) report for the third quarter. The Index
rose 12.3 percent on an annualized basis compared with 15.3 percent in the second
Nationally, home prices increased 12.1 percent on an annual basis in the year
since the third quarter of 2004 compared with 14 percent for the corresponding
rates for quarters two of 2004 and 2005.
These national home sales figures were the lowest in the last five quarters
but, as with all of the reports we follow, were distributed unevenly across
the country. Annualized, the increases ranged from 6.0 percent in the West North
Central region to 19.5 percent in both the Mountain and South Atlantic regions.
Frank Nothaft, Freddie Mac's chief economist said "The gradual
rise in mortgages rates during the third quarter moderated home price gains
compared to this second quarter.
Home sales and single-family housing starts are still expected to set a new
records this year, The devastating effects of (the hurricanes) will likely keep
overall construction material costs high and add to new construction in the
The third report hitting the news this past week was the UCLA Anderson
The report, released on Wednesday, projected that (a decline in) housing would
start slowing the economy this quarter or the next. While the report was focused
on the California housing market, it made national news by stating that this
decline, likely to be spread over several years, could result in the loss of
as many as 500,000 construction jobs and 300,000 more in the financial sector.
The report cited several statistics that it said indicate that the slowdown
could already be underway; construction down 5.6 percent in October; new home
sales in decline; mortgage applications dropping; and housing construction outpacing
Previous Anderson Forecasts have suggested that housing construction in the
United States would begin to decline by the middle of this past year,
The report noted that eight of the last ten economic recessions began with
slowdowns in the housing sector, and one of the authors of the study, economist
Ryan Ratcliff, stated that "if the housing market slows more than we are
expecting, a recession is not out of the question."