The U.S. economy continues to chug along at a fairly steady pace. In fact, during the second and third quarters of 2007 the U.S. economy grew at an above average rate, despite the significant slowdown of the housing sector.
The sharp decline in U.S. housing starts that began in the second quarter of 2006 continues. Total housing starts have fallen from an annual rate of 2.127 million during the first quarter of 2006 to 1.304 million during the third quarter of the 2007. While multifamily starts dropped by 67,400 (or 17.9 percent) during that period, single-family housing starts fell by 756,400 for a 43.2 percent decline!
Despite the decline in housing production, the U.S. economy remains in very good shape. The U.S. unemployment rate was a low 4.6 percent during the third quarter of 2007, although growth in total employment remains sluggish. In part, the rate of growth is being constrained by a lack of available labor.
GDP growth is likely to be somewhat below average during the next year, and the unemployment rate is likely to drift upward slightly. A situation that is referred to as a "growth recession." This situation is unlikely to abate until the housing market recovers from its recent excesses. The biggest impedements to a rebound are the problems in the financial sector that resulted from poor lending practices during the past several years. These will take quite a while to reverse themselves, and, as a result, the recovery of the housing sector is expected to be quite slow.
The labor market will weaken modestly during the next year, with the unemployment rate rising to 5.2 percent during the first half of 2009. This will also act as an impedement to the housing recovery, since employment growth is so closely tied to housing demand.
The Federal Reserve is expected to continue its attempts to keep the economy growing, and so it is expected that there will be at least one more quarter point decrease in the Federal Funds rate. (There may be more.) This will only occur if inflation remains under control, as we assume it will. Luckily the recent runup in energy and food prices appears to have had little effect on the overall rate of inflation.
Mortgage rates will see some downward movement during 2008. The mortgage rates on fixed-rate and adjustable-rate mortgages are expected to fall modestly during the next few months, with fixed rate mortgages seeing a larger decline than adjustable-rate mortgages. This is due to the problems with the sub-prime and related markets which are tightly connected with adjustable-rate mortgages. This is mainly a response to policy moves that have already been put in place by the Federal Reserve, but that have yet to fully work their way through financial markets.
Total housing starts will post year-over year declines from 2007 to 2008 of 23.9 percent. This will be followed by a further decline of 7.1 percent in 2008. The housing market is expected to strengthen during 2009, but that rebound will be modest, with the increase being only 12.8 percent.
The market will be slow to rebound during 2008 and 2009 for a variety of reasons. First, more restrictive credit practices will restrain markets. Second, the spectacular increases in home prices that have stimulated interest in home purchases due to "investment incentives" have slowed (or reversed in some limited areas) and are taking away some of the "investment (and in some cases speculative) demand" for housing. And finally, the modest job growth that is expected will limit the opportunities of some households to move into the housing market.
A decline of 9.6 percent for single-family housing starts is expected in 2008. There will be a wide variation in the performances of housing markets across the country.
For most of the forecast period through the end of 2009, the multifamily housing market, which has seen little movement in construction levels during the past eight years, will continue at a pace just above the 300,000 mark. A dramatic rise in the share of this market that is owner-occuppied (condominiums) has helped (and will continue to help) this market to maintain production levels.
Table: Crystal Ball's Economic and Housing Outlook -- October 31, 2006
Crystal Ball Ecomonics, Inc.
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