Freddie Mac has released its September Economic and Housing Market Outlook, and while Hurricane Katrina raked the Gulf Coast only eleven days earlier, it looms large in the report.

Indeed, Katrina was the one word title of the report which was released on Thursday by the Office of the Chief Economist. The report stated that the effects of the hurricane will be felt in the Gulf region for some time to come but the effect on the national economy has also been "quite immediate through lost output from the Gulf region, decline in wage income from workers who have lost their jobs, spike in energy costs, and disruption to import-export trade flows through New Orleans and other near-by ports."

The report projects that the disaster will cut 0.5 to 0.75 percent from real Gross Domestic Product growth in the second half of the year to about 3.5 percent annualized. The other major impact will be to employment which will take a hit of about 200,000 to 300,000 in net shortfall in September which is directly attributable to Katrina. This could result in a net decline of as much as 100,000 jobs rather than the "healthy employment gain" that had been expected.

Consumer prices will also be impacted. The August Outlook projected consumer price increases as 2.4 percent in the third quarter of 2005 and 2.2 percent in the fourth quarter (annualized). The new data is projecting increases of 3.2 in each of the two quarters. The increase, however, is seen as only temporary, returning to the 2.5 percent projected for 2006.

For all the bad news, however, the report upped the ante for the housing sector. Housing starts were up 200,000 to 7.2 million from August projections for the entire year and total home sales were projected to be up to an annual rate of 7.23 million in quarter three and 7.11 million in quarter four to 7.28 and 7.16 million respectively. 2006 sales are expected to rise 4 percent over August estimates, in part due to families displaced by Katrina seeking new homes.

Housing price estimates were also boosted upwards. August data showed housing price appreciation of 10.7 and 7.4 percent (annualized) during the last two quarters. The September estimates are 11.5 and 7.7 percent.

The mortgage market is expected to be very healthy with conventional loan originations expected to reach $2,540,000,000 in 2005, with a slight decline in the third quarter but about $40 million more in the fourth quarter than was anticipated last month.

Earlier reports had projected that the Federal Reserve would continue its measured quarter-point increments in the federal funds target. However, the September report predicts that the Board will pause in order to weigh the impact of Katrina on the economy and to support the credit needs of the recovery efforts. While short term rates have had little impact on mortgage rates in recent months, Freddie has knocked one basis point off of its rate projections for the fourth quarter, expecting that the 30-year fixed rate will be 5.9 percent instead of the 6 percent it has long predicted. It is holding firm to its end-of-2006 predictions of a 30-year rate of 6.3 percent.

While mortgage interest rates will continue their recent declines, reconstruction efforts will probably force the prices of construction materials, particularly plywood and roofing tiles, upward. Increases in basic materials such as these, cement, gypsum board and so forth of only five to ten percent could add two to three percent to new home costs in the short term. The net effect if lower rates and higher material costs is likely to add to new starts in 2006 and to existing home sales relative to what they would have been without Katrina.

The next Freddie Mac report is scheduled for release on October 10.