The Forecast

U.S. Economic Outlook

(PDF: 28KB)The recent action by the federal government in "taking over" the two GSEs could be the shot in the arm that the housing market needs.
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The Forecast: Charts(PDF:180KB)With the government's takeover of Fannie and Freddie, the spread between 10-year Treasuries and the 30-year fixed mortgage rate will surely narrow and hence result in lower mortgage rates.
A "Shot in the Arm" for the Housing Market
By Lawrence Yun, NAR Chief Economist

Home sales continue to edge up and down. Overly stringent lending criteria imposed by Fannie Mae and Freddie Mac in the past month no doubt held back contract signings. Pending home sales (see page 3) declined in July, after rising in June. But the recent action by the federal government in "taking over" the two GSEs could be the shot in the arm that the housing market needs.

Even with the latest pullback in contract signings, pending home sales have been fairly stable on a national basis for nearly a year, with dramatic local market differences continuing. Contract signings have been steaming ahead, nearly doubling in activity from a year before in several California and Florida markets. The outer Washington, D.C., exurbs also are coming around very strongly. That bodes well for future home sales nationally.

Another factor is the attractiveness of FHA-mortgages. FHA is taking a more active role in serving a broad cross-section of home buyers, but it will take some time to fully get up to speed. There's been a surge in FHA mortgage applications. Interestingly, many people in high-cost areas aren't familiar with FHA programs. REALTORS® should be aware that they are one of the major sources of information about mortgage programs for their clients. They should familiarize themselves with this increasingly valuable program.

Still, there are many ambiguities in the marketplace. The economy is producing more, yet job cuts continue. GDP growth in the second quarter of this year was 3.3 percent. In fact, the last time GDP growth was negative was in the fourth quarter of last year - and that was before the unprecedented surge in oil prices. In spite of relatively healthy GDP growth, 84,000 non-farm payroll jobs were shed in August - more than most analysts (including me) expected. And those most recent job cuts have been across the board in all sectors.

Those job cuts help explain anemic consumer confidence. While consumer confidence rose in August, the Conference Board reports that its consumer confidence index stood at 56.9 for that month.. The reading suggests that for most Americans, the economy is basically in "neutral." A first-time home buyer tax credit - one of the provisions of the economic stimulus legislation passed and signed into law earlier in the summer - and lower interest rates on newly conforming jumbo loans favors consumers. But buyer confidence remains low. Even with the Treasury Department's direct intervention in the secondary mortgage market, it is unclear if we will go back to sound normal underwriting criteria, or if it will remain overly stringent. The housing market outlook is very cloudy.

We often cite the real estate professional's mantra: all real estate is local. But economic conditions are also local. The speed and timing of a housing and economic recovery depends on local market conditions. Based on local market fundamentals, I expect robust home price growth in places like Denver over the next two years. Up until the weekend of September 12, I would have included Houston in that list as well, but given the recent damage wrought by Hurricane Ike we'll have to watch the Houston market closely to see how fast its economy recovers from the storm. In addition, the frequent reporting of multiple bids in California and Florida may be signaling a bottom in home prices in those areas. Nationally, home sales are stable now but are expected to increase in coming quarters.

Mixed Regional Results

There were differences in delinquency and foreclosure rates by state. While delinquency rates rose across the country from the first quarter to the second quarter of 2008, not all states experienced the same pattern.

The top five states with the highest quarter-over-quarter increase in delinquency rates were Delaware (104 basis points), Mississippi (103 basis points), Massachusetts (100 basis points), Maryland (96 basis points), and Indiana (92 basis points). On the flip side, the states with the smallest change in delinquency rates were South Dakota (20 basis points), North Dakota (27 basis points), Wyoming (32 basis points), Colorado (33 basis points), and Oregon (34 basis points).

In terms of foreclosure rates, the national numbers masked surprising quarter-over-quarter regional changes. The rate of foreclosure starts dropped in 12 states from the first to the second quarter of 2008. Massachusetts recorded the largest decline-33 basis points - followed by Maryland (a 9 basis point decline) and Mississippi (7 basis point decline). The other states with declines in foreclosure starts were Nebraska, Arkansas, Texas, South Dakota, Missouri, Colorado, Montana, Michigan, and Louisiana.

Meanwhile, foreclosure inventory rates also dropped in 17 states over the first two quarters of 2008. Wyoming posted the greatest drop-24 basis points - followed by Massachusetts (declining 21 basis points), and Mississippi (a decline of 20 basis points). Foreclosure inventory rates also declined in Alabama, Arkansas, Indiana, Iowa, Kansas, Louisiana, Michigan, Missouri, Nebraska, North Dakota, Ohio, Oklahoma, South Dakota, and Texas.

These positive changes were nonetheless offset by foreclosure rate increases in states like Florida, Nevada, Arizona, California and New Jersey. These states experienced significant increases from the first to the second quarter of 2008, both in terms of foreclosure starts and foreclosure inventory rates. Florida posted the highest figures, with a 139 basis point jump in foreclosure inventory and a 35 basis point increase in foreclosure starts. The changes were similar in the other four states-Nevada (80 basis point change in inventory, 31 basis point change in starts), Arizona (68 basis point change in inventory, 29 basis point change in starts), California (73 basis point change in inventory, 23 basis point change in starts) and New Jersey (39 basis point change in inventory, 14 basis point change in starts).

Fourth Quarter 2007 compared to Fourth Quarter 2006

Five markets which went down in its prices:

1. California -6.65%
2. Nevada- 5.86%
3. Florida- 4.69%
4. Michigan- 4.27%
5. Rhode Island
2.56%

Five markets which went up in its home prices:

1. Utah - 9.27%
2. Wyoming - 8.27%
3. North Dakota 7.87%
4. Montana - 6.90%
5. Alaska - 5.97%

End of the Week Market Projection

The “second” reading of GDP growth in the 4th quarter of last year was unchanged – a basically flat 0.6 percent growth rate. As we go forward, economic growth in the first half of this year will be essentially non-existent. But there is some light at the end of what many pundits view as a dark tunnel. By the second half of the year, the economy will expand at slightly higher than 2 percent. The 2008 fiscal stimulus package contains over $100 billion in tax rebates. Those checks should be in taxpayers’ mailboxes in early summer. This tax cut is more than twice as high as a similar rebate passed in 2001. Past research suggests that consumers’ propensity to spend out of those tax rebates is about 40 cents to 50 cents on the dollar. That translates into additional consumer spending of $60 to $80 billion in the second half of the year. Make no mistake – this stimulus is the key factor in helping move the economy in the second half of the year. Other Factors than Housing Involved in Economic Doldrums Seems like most people blame the housing downturn for our economic doldrums. But there are other factors. This tax rebate is needed to compensate for outrageously high oil prices and from falling stock market values. A $104 dollar per barrel oil price is a major drag on consumer spending – and something that virtually every consumer feels. Europeans are not paying as much because of their stronger currencies. The higher oil price, which is priced in U.S. dollars, is partly driven by the very weak dollar. The weaker dollar is caused in part by a higher inflation rate in the U.S. vis-à-vis the rest of the world’s advanced economies. If a currency is losing its purchasing power, why hold that currency? Recall, the oil price was under $20 per barrel just 10 years ago. When the price of oil rises, it is essentially a tax placed on consumers with less money available to spend on more enjoyable items and activities. This “oil tax” unfortunately does not even go into the U.S. Treasury. Rather it fills the coffers of the governments of Russia, Venezuela, Saudi Arabia, Nigeria, and Iran. In today’s world, it is a transfer of money from a democratic country to a non-democratic country. The housing market will also get some relief. A higher loan limit – up to $729,000 from $417,000 – in several local areas, including Los Angeles, Orange, and San Francisco counties, will have a big impact in bringing out the buyers. As a result, home sales in the second half of 2008 will no doubt be much stronger than in the first half. Look for existing-home sales to rise to a 5.7 million-unit pace in the second half versus 4.9 million in the first half.Pent-Up Demand Rising sales will also bring down inventory and help strengthen home prices. The national median price of an existing home will fall in the first half of the year and then rise in the second half. For the year as a whole, the median price will have fallen by 1 percent – after having fallen 1.4 percent last year. Of course, there will be tremendous local market variations. The Northeast region is likely to be first region to show signs of stabilizing and then strengthening housing market conditions. The West region will likely trail behind. The West region could, nonetheless, surprise us on the upside. What is unique about the current housing cycle is the pace of price declines in some local markets, which can significantly improve affordability conditions in a short time. Home prices are falling at or near a double-digit pace in California, Nevada, and Arizona. A sudden quick home price adjustment may be just the thing to quickly induce buyers back into these marketplaces. After all, as is the case in many parts of the country, jobs have been created in those Western states over the past two years even against the backdrop of a housing market slump, and hence, there exists significant pent-up demand. New home sales will take much longer to turn around. That is simply due to the fact that there are far fewer new homes being built. Single-family housing starts have fallen by more than 50 percent in the past two years. Based on housing permits – generally a reliable indicator of upcoming housing starts – new home construction will fall further for the remainder of the year. New home inventory has been trending down but more cutbacks are needed. Therefore, homebuilders need to further bite the bullet and hold back construction. Loan modifications and other foreclosure mitigation programs are all well intended and good, but the best policy assistance in our current market condition is to unleash the pent-up demand. Any measures that violate the sanctity of private contracts – such as permitting judges to reset interest rates – should be avoided as those can greatly harm home sales by raising the cost of borrowing on new loan originations. There is some discussion of a possible tax credit for first-time home buyers. Such a policy will be a great stabilizer for the housing market and the economy.