Freddie Mac seems to be seeking a little cover in its March 2007 Economic
Outlook released late last week. These monthly forecasts always have
a theme which the authors tend to torture relentlessly and this month it is the
old adage - "In Like a Lion..." News about the housing market
is likened to the "proverbial March weather, with each warm breeze followed
by an icy blast." The outlook states that most analysts expect things to
improve late in the year and buyer traffic in the spring market will provide an
important test of the environment. But, hedging its bet, Freddie quotes "even
the most cheery forecasters" as warning about two possible storms
still on the horizon.
First is what the report calls the burgeoning overstock of unsold homes
While official government figures reported that the inventory of new homes peaked
last July and has declined slightly since them, Freddie warns that the number
of unsold new homes is likely much higher than the official figures since sales
and inventory figures are not revised to reflect cancelled contracts. Vacant existing
homes for sale represent another source of hidden inventories and these vacancies
soared to record levels last year. Condos are the most affected sector with vacancy
rates over 11 percent in buildings with more than 10 units.
This oversupply of houses has, of course, affected house prices, especially
in those areas that experienced the biggest boom during the days of the bubble.
For example, S&P/Case-Shiller® data shows prices in Boston down 4.5
percent and San Diego down 3.3 percent during the fourth quarter of 2006 versus
prices one year earlier. The Freddie Mac Conventional Mortgage Home Price Index,
while naming seven states, including California and Nevada, where prices declined
in the fourth quarter, points to a 4.9 percent increase nationally.
The second "storm" that may blow away any upcoming
recovery is the deteriorating sub-prime
mortgage market. Early payment defaults on subprime loans in the first half
of 2006 were at more than triple the rate of defaults one year earlier. Even
the non-subprime market is showing signs of stress with delinquency rates on
mortgages at commercial banks reaching the highest level in four years. Bank
regulators have called for stricter underwriting standards and the Federal Reserve's
Senior Loan Officer Survey reported that 15 percent of reporting banks were
tightening standards on mortgage loans, the highest percentage since the early
Still, there is no sign of a credit crunch in the prime mortgage market. Rates
continue to be low and the GSEs continue to provide liquidity so borrowers continue
to have access to mortgages at reasonable terms.
The economic weather report aside, the forecast projects that, since long-term
bond yields have recently come down, rates for 30-year fixed-rate mortgages
will as well. Freddie has lowered projections for the 1st and 3rd quarters of
2007 to 6.2 percent and 6.3 percent from the rates projected in February of
6.3 and 6.4 percent respectively.
Housing starts were down 13 percent in 2006 as compared to
2005 and, by the fourth quarter were at a 1.56 million unit annual rate. Freddie
forecasts that the worst is over and that home construction will gradually increase
over the year. Home sales, on the other hand, are expected to fall another 5
percent this year on top of the 9 percent drop in 2006. This, however, is good
news as the February forecast was for annualized sales of 6.40 million in the
first quarter while now Freddie is projecting 6.45 million units. In fact, the
March Outlook projected higher home sales for the first three quarters than
did the February forecast; Quarter 2 is estimated at 6.40 million compared to
6.30 and Quarter 3 at 6.40 million as opposed to 6.25.
Freddie states that "home prices remain the most difficult
of housing-related statistics to forecast due to the non-homogeneity of homes
and the inclusion of unrelated benefits in sales contract prices such as seller-paid
closing costs." The March projections for the year shows a modest 2.8
percent increase, much lower than the 6.2 percent rate in 2006 and lower than
the 3.3 percent appreciation anticipated in the February forecast.
So, the March Outlook is for partly sunny, partly cloudy, with rising temperature
invariably accompanied by continued stormy weather.