We will give only a passing nod to Freddie Mac's Economic and Housing Market Outlook for May as much of it deals with the Quarter 1 report on cash-out refinancing which we already covered in detail here on Tuesday. However, a few things are worth noting.

First of all, as regards the cash-out data, the Office of the Chief Economist which issues the report noted that the housing market impacts the larger economy in many ways but especially through homebuilding and the purchase of appliances and furniture, especially when families are moving into new or existing homes. The report states that "According to many prominent economists, including former Fed. Chairman Alan Greenspan, the extraction of home equity wealth in recent years has propped up consumer spending. A sudden swoon in housing prices, they warn, could shut off this spigot, prompting a sharp cutback in spending and elevating recession risks."



With the growth of house price appreciation now stalled or even reversed, this has fueled fears that homeowners may face an inability to withdraw equity which could in turn undermine consumer spending. But, the data released on Tuesday shows that there is "ample margin for taking out cash without running down home equity."

The Outlook also provided the following insights:

Real GDP grew at an annualized rate of 1.3 percent in the first quarter which was the slowest pace in four years, largely due to the slowdown in housing and to a bigger trade deficit. This is expected to grow to around 3 percent in the third and fourth quarters, again as a result of improvements in home construction. The slowdown in the housing market, however, will still have repercussions into 2008.

Mortgage rates will hold fairly steady at an average of 6.2 to 6.3 percent this year and then edge up to a 6.5 percent average over 2008. The market share of adjustable rate mortgages which has plummeted from 28 percent in the first quarter of 2006 to 11 percent in the most recent period will remain low over the next two years as the inverted yield curve makes those loans unattractive in comparison to fixed-rate mortgages.

Housing starts will pick up in the second half of the year but residual inventories of new homes will continue to drag on that sector of the economy.

Home sales will bottom out in the second quarter of this year at an annualized rate of 6.4 units. The pace is expected to reach 6.5 million units in 2008.

Mortgage activity will reflect a 40 percent refinance pace both in the guise of cash-outs and in refinancing a sizable number of mortgages scheduled to reset this year and next. This refinance rate should, however, drop in 35 percent in the last half of 2007 and average 26 percent in 2008.