Normally, housing economists don't second-guess the Fed, but with interest rates rising and home sales slowing, some are starting to worry that housing could really tank if short-term interest rates are raised again.
In mid-May, the National Association of Home Builders chief economist David Sieders wrote, "We continue to believe that the evolving housing slowdown will be a moderate adjustment process, in the context of the economic and financial market environment we're projecting for 2006-2007. However, the adjustment could turn out to be pretty rough in some previously overheated markets."
By the first of June, economists were calling for the Fed to back off. David Lereah, the National Association of Realtors' chief economist, said in recent statement, "This is a time for the Fed to pause on rate hikes because we have some interest-sensitive housing markets that have become vulnerable."
Bad news quickly followed that global interest rates were up, the DOW dipped below 11,000 for the first time since March, and that inflation is starting to run away with high oil prices, higher consumer goods, and rising salaries.
But not everyone is worried. Freddie Mac economist Frank Nothaft, in its most recent weekly report noting slightly lower mortgage interest rates, said, "The slight drop in long-term rates reflects a cautiously optimistic outlook in the market that core inflation remains contained.
He continues, "Currently, the Fed is monitoring each of these economic reports and will take their impacts into consideration at its next meeting towards the end of June, leaving open the question of what action, if any, the Fed will take."
The Federal Reserve has raised short-term interest rates 16 times in 18 months. Fed chairman Ben Bernanke suggested in his congressional testimony on April 27th that he planned to "monitor housing markets closely."
Meanwhile, housing starts are down over the last three months, and large builder stocks have tanked to the arguable point of being oversold, and the NAR is doing its best to keep optimism about housing going, despite some dire forecasts -- that existing-home sales are projected to drop 6.8 percent to 6.60 million this year from the record 7.08 million in 2005; new-home sales are forecast to fall 13.4 percent to 1.11 million from a record 1.28 million in 2005; and housing starts are likely to decline 6.2 percent to 1.94 million in 2006 compared with 2.07 million last year.
But the anticipated drops aren't as bad as they sound, and are part of a normal cycle of ups and downs, particularly when prices get out of reach.
Lereah says, "Now the housing market has cooled, but 2006 is still expected to be the third strongest on record. In this case, experiencing a slowing from a hot market is a good thing because we need a solid housing sector to provide an underlying base to the economy, and slower appreciation will help to preserve long-term affordability."
What will sustain the optimism, of course, is jobs, and there's been so positive news on that front. The NAR predicts that the jobless rate will hold at around 4.8 percent. The first week of June, the jobless (based on people asking for unemployment benefits) rate fell to 302,000, and first-time claims fell by 35,000 from the last week in May at 337,000.
However, it takes several reports to see a trend establishing, so optimism on jobs may be slightly premature.
The NAR also expects the 30-year fixed-rate mortgage to hold the line at 6.9 percent during the second half of the year, and mortgage interest rates did ease this week.
If inflation holds at about 3.1 percent, slightly down from a rate of 3.4 in 1005, then housing gains, anticipated this year to rise 5.3 percent to a national median existing home price of $231,300, will be higher than historical norms, says Lereah.
"Historically, home prices rise 1.5 to 2 percentage points faster than the rate of inflation," he explains. "The double-digit home price gains we saw in 2005 underscore what a superlative year it was."
