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
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
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.