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Negative Impact of Housing On Economy Lessens As Inventories Decline

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There were lots of little nuggets of information in the February Economic Outlook issued by Freddie Mac on February 8.

It addition to the usual forecasts of future performance of both the economy in general and the housing segment in particular, this report recapped some of the more interesting facets of the 2006 market. For example:

• The housing correction last year subtracted 1.2 percentage points from Gross Domestic Product numbers in the third and fourth quarters of 2006. This decline should end by years end but further job consolidations should be expected by homebuilders, real estate agents, and mortgage brokers..
   
• Inventories of new homes have begun to decline and were down to a 5.9 months supply at year's end compared to 7.2 months in July. These figures, however, have to be weighed against the way the data is collected. As we have often stated here, Census Bureau figures on new home sales are recorded at the point that sale contracts are signed. This might be when the house is completed and waiting for an owner or at the point that the builder puts the raw home site on the market. No matter the point of sale, if a contract is cancelled that cancellation is neither reflected in revised figures nor do these units return to inventory. Cancellations were running as high as 30 percent last fall so there may be significant aberrations remaining in the inventory. Cancellations have now slowed, however, according to a number of large construction companies. "Thus, while the actual months' supply likely still exceeds the reported figures, the improvement (in inventory) may in fact be greater than the official statistics indicate."

 
• There are apparently a lot of "hidden inventories" because of homeowner vacancies. Vacancies were up to 2.7 percent in the fourth quarter compared to 2.0 percent at the some point in 2005. Homeowner vacancies in larger structures with 10 units or more were over 11 percent compared to 6.9 percent in quarter four of 2005, but vacancies for single family homes rose from 1.8 percent to 2.3 percent "Such a rise corresponds to additional housing units roughly equal to half the inventory of new homes."

 
• Excess inventories may continue to weigh on home prices over the long term and sellers are only reluctantly lowering prices as they slowly recognize the new reality of a buyers market.

 
• Supply figures are lowering relative to demand because housing starts have decreased. Single family starts in December were off 30 percent from their peak but sales of new and existing homes were down 18 and 14 percent respectively. This decrease in new homes coming on the market will eventually, maybe over as much as a year, ease the inventory glut.

 
• Poor credit performance among loans issued in 2005 and 2006 especially non-conforming or sub-prime mortgages is a red flag that indicates a possible rise in delinquencies if job losses or other problems increase and homeowners cannot refinance or sell their homes because of a weakening market.

Other projections are that the ARM share of all mortgage originations will fall to 13 percent this year but will recover, perhaps to as much as 15 percent in 2008 as the interest rate yield curve widens a bit.

Housing starts will be 10 percent lower in 2007 than in 2006, totaling around 1.62 million units as builders work off inventories. Builders will come back, however, in 2008 with starts running around 1.70 million.

Home price growth will drop further to 3.3 percent in 2007 and remain constant at that level through 2008. It is important to note that this still represents an increase in home prices merely a slowing of the rate.

Mortgage originations are forecast to drop about 6 percent in 2007 to $2.5 trillion and fall yet another 1 percent the next year. This will largely reflect a fall-off in refinancing activity.