The housing sector has provided an unprecedented degree of support to the U.S. economy during the past year, but things are about to change. The very success of housing will soon provoke a slowdown, and a rising interest rate structure will seal the deal.
The housing sector obviously has feasted on the low and falling long-term interest rates of recent years and the Fed’s hikes in short-term rates after mid-2004 did little damage to the adjustable-rate mortgage market as most lenders discounted initial rates on ARMs and many issued highly aggressive forms of ARMs -- the “exotic” types that concern Fed Chairman Greenspan. These types of loans fueled speculative purchases of single-family homes and condo units, and those purchases helped fuel the double-digit increases in home prices recorded in recent times.
Our housing forecast depicts a changing balance in the markets, largely because of affordability problems caused by the accumulation of large price increases as well by evolving conditions in housing finance. We believe that home sales and housing starts have been toying with cyclical highs in recent months and that a fade in market activity is about to develop. The forecast shows modest declines in housing production in both 2006 and 2007, despite rebuilding activity in the wake of Katrina and Rita.
It seems clear that recent housing production and recent rates of house price appreciation have been unsustainable, and the production level we’re forecasting for 2007 is back within the long-term forecast range we’ve established for this decade. That range is based on estimates of demographics, net replacements and vacancies (including second homes) -- the trend factors that eventually win out.
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