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 findings:

  • 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 quarter.

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 affected region."

The third report hitting the news this past week was the UCLA Anderson Forecast.

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 population growth

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."