David Seiders, chief economist for the National Association of Home Builders, has just released The Seiders Report, an analysis of housing economics. According to Seiders, key findings are:

• Growth Domestic Product growth still is in a slowdown phase and recession risks have risen to some degree. The labor market still is performing well but some weakening is likely later in the year.  

• Core inflation (less food and energy prices) still is running on the high side, largely because of perverse upward pressure from the imputed homeowner's equivalent rent component, but inflation pressures should subside as the year progresses. (Translation: higher rates are pushing up inflation.)  

• The Federal Reserve continues to fret about core inflation but monetary tightening is not in the cards this year. To the contrary, we now expect a quarter-point cut in the federal funds rate at the conclusion of the August 7th FOMC meeting (rather than at the June 27-28 meeting).  

• Long-term Treasury and prime home mortgage rates still are running in a historically low and narrow range, and we expect only slight upward pressure on long rates over the balance of the 2007-2008 forecast horizon.  

• The subprime mortgage debacle has prompted tighter mortgage lending standards in the subprime and Alt-A components of the home mortgage market. NAHB's surveys of builders are documenting adverse impacts on both home sales and sales cancellations.  

• A record volume of vacant (unoccupied) housing units is weighing heavily on both single-family and multifamily housing markets, and historical norms suggest an excess of about 1.3 million vacant units on the market.  

• Deterioration of the supply-demand balance in housing markets has downside implications for house prices and has prompted downward revisions to NAHB's forecasts of home sales and housing production for the balance of 2007-2008. However, we're still showing a gradual recovery process beginning around mid-2007. (Translation: too much housing inventory is going to weaken prices)  

• Massive uncertainties about the likely adverse impacts of the emerging mortgage market problems on both the effective demand for homes and the dimensions of the inventory overhang (via foreclosures) have created an unusually broad range of risk around NAHB's current baseline (most probable) housing forecasts.

Economic Growth

Growth of real gross domestic product (GDP) now stands at 2.5 percent for the last quarter of 2006, better than the preliminary 2.2 percent estimate but still a below-trend pace. Indeed, subpar growth was registered during the final three quarters of last year, and available information points toward another tepid performance in the first quarter of this year (we're currently estimating 2.0 percent).  

The dramatic housing correction has been the major drag on GDP growth since early last year, and another major decline in residential fixed investment will weigh heavily on first-quarter economic growth as well. The economy now is also faced with an unexpected weakening of business spending on capital equipment and software, a component of the economy that had been in a strong growth phase but that started to falter late last year.  

NAHB's forecast shows somewhat better GDP growth in the second quarter of this year (2.4 percent) and quite respectable growth in the second half (averaging 2.8 percent). We're counting on better performances from housing and business fixed investment to help generate those patterns, and we're also counting on gathering support from net exports. There are major uncertainties in the outlook, of course, and it's fair to say that the chances for a solid second-half rebound seem to be slipping; indeed, the probability of recession later this year has risen to some degree (we now put it at 25 percent).  

Labor Market

Payroll employment growth has been remarkably well maintained in the face of the marked slowdown in GDP growth since early last year, and the unemployment rate actually has continued to gravitate downward. Indeed, employment growth averaged a highly respectable 152 thousand per month in the first quarter and the unemployment rate slipped back to a cyclical low of 4.4 percent in March.  

The striking divergence of output growth and labor market conditions could reflect underestimation of the economy's strength in the GDP accounts (Gross Domestic Income looks stronger than GDP) or a slowdown in growth of labor productivity (output per hour); in this regard, it's obvious that productivity in housing production has slipped quite a bit. But the key to the economic riddle of surprisingly robust labor markets may very well be normal lags in labor demand by businesses behind shifts in demand for economic output.  

"If that's the answer, it's only a matter of time before the GDP slowdown results in slower employment growth and a higher unemployment rate," he says.

For the full report, visit nahb.org.

Published: April 23, 2007

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