Freddie Mac's Economic and Housing Market Outlook for October is headlined "Finding Solid Ground." It is another in a series of projections that the housing market is cooling not crashing and that the "cooling" market will have little impact on the economy as a whole. It does note that, in August, sales of new and existing homes were 12 and 18 percent lower respectively than a year earlier, housing inventories have "bulged" and there is now a 6.6 month supply of new homes on the market.

The report, published by the Office of the Chief Economist, gives a nod to media reports of some rather outrageous concessions by sellers as they attempt to move their homes - throwing in luxury cars, offering trips to exotic resorts, plasma televisions, etc, - and an increasing use of builders' incentives such as materials upgrades to move new homes without lowering sales prices. The risk is that the indirect effects of the housing slump - lower consumer spending on major household goods such as furniture and appliances and job and income setbacks in the construction, real estate, and mortgage industries - will have a larger impact on the economy as a whole. Freddie Mac projects that the "overall drag from the housing sector" will cause as much as a full percentage point loss from Gross Domestic Product growth in the third and four quarters. For the third quarter alone the report changed its estimate from the 2.9 annualized growth projected in its September forecast to 2.0 percent to reflect "greater-than-expected" declines in home construction and sales, and reduced business spending.

The report also speculates that, even though homeowners are not pulling equity out of their homes in the form of cash as they had been (the difference is a negative 30 percent since a year ago) consumers are still spending. Much of the decline in "equity extraction" it says can be attributed to slower home sales which have locked up equity which might otherwise have further increased consumer spending.

Falling energy prices were cited as one of the positive factors that will help to shore up the economy by effectively increasing household income and recent record levels in the Dow Jones are contributing to household net worth, even if only on paper. The housing markets are already benefiting from recent declines in interest rates; the 30-year fixed-rate mortgage has dropped 50 basis points since summer, triggering a boomlet in refinancing. The report speculates that much of this activity is on the part of borrowers with ARMs who are seeking to lock in fixed rates before their current mortgages adjust.

The forecast notes that there are some signs that the housing markets might be "nearing a floor." For example, applications for purchase money mortgages have stabilized recently at 2003 levels and that year was considered a moderately strong one for housing demand.

Homes are projected to appreciate at an average of 5.7 percent for the second half of 2006 and 6.2 percent during the first two quarters of next year. New home construction was down 3.4 percent in the first part of this year compared to the same period in 2005; however, it is expected to be 20 percent lower, year over year, in the second half of 2006. Home sales are forecast to be off the 2005 pace by 9 percent for a total of 6.8 million units this year and a total of 6.4 million next year.

Looking back to the January Outlook, there have been changes in projections, most so small on a month to month basis as to be overlooked but cumulatively a bit significant. For example, growth in the GDP was projected at 3.6 percent in January and 3.2 percent in Tuesday's report. Total home sales, forecast at 7.1 million units at the beginning of the year are now expected to total 6.76 percent and the expected growth in mortgage debt has dropped from 11.8 percent to 9.9 percent (it was nearly 14 percent in 2005.)

The interest rate projections, however, have been remarkably stable over the last ten months. In January the Outlook saw average rates for the 30-year fixed and 1-year ARM at 6.4 percent and 5.4 percent respectively. The most recent report projects the rates for the year at 6.5 percent and 5.5 percent.