Will the economy return the favor?
The April 2007 Economic Outlook issued by Freddie Mac credits the housing
market with pulling the overall economy through the recession in 2001
and restoring it to a vigorous pace of growth over the following years. Now,
with the housing sector floundering, can the macro economy with its overall
GDP growth step in to shore up the housing market? The Outlook points to the
robust 180,000 growth in non-farm jobs last month as one indication that could
Spring usually provides the strongest home selling period of the year and with
interest rates still relatively low and the job market improving the forecast
sees conditions "ripe for a firming in housing demand," but acknowledges
that there are still problems.
The growing inventory
of new homes is one factor that will
have to be overcome. Not only is the inventory at a 16 year high relative to
the sales pace but this official inventory does not reflect the cancellation
of new home sales contracts which several large builders reported ran at around
30 percent of all contracts signed last year. These cancellations
also mean that sales were lower last year than reported and that inventories
are larger. Cancellations have now slowed and builders are beginning to resell
those houses where contracts had fallen through, but these sales are not counted
in the statistics nor subtracted from inventory. The Outlook speculates that
these anomalies in the data may actually account for the recent downturn in
new home sales.
It is far too early to decide that the housing market is out of the woods.
The subprime mess may affect home sales if large numbers of
buyers find out they can not qualify for a mortgage and foreclosures may dump
more houses onto the market. Even if demand does increase, the remaining excess
supply will hold back price appreciation and even lead to price declines in
some local markets.
As to specifics, the Office of the Chief Economist makes the following
- Mortgage rates will average 6.2 percent this year and 6.4 percent in
2008. This is 10 basis points lower than Freddie Mac had predicted in the March
- Builders reacted quickly to the declining market and housing starts
are off more than 30 percent from one year ago. Once excess inventory is sold
off, housing starts will turn around. The estimate is for 1.56 million housing
starts this year.
- Home sales seem to have stopped declining and are expected to increase
later this year. Total home sales are projected to average 6.44 million this
year and 6.49 million next year.
- Home prices will post their smallest gain in several years and will
finally fall into line with other parts of the consumer economy. Prices are
expected to rise 2.5 percent this year and 3.2 percent next.
- Refinancing will remain strong this year and next but, with many families
moving to fixed rate mortgages from ARMs the numbers of refinances will slow
in future years. As far as ARMs are concerned, Freddie has revised downward
its estimates of their market share to 11 percent in 2007 and 13 percent in
2008. The historical market share of these products has averaged 29 percent