Wednesday, May 03, 2006

Economic Forecast

There have been no popping real estate bubbles this year. Housing has been having a soft landing according to economists at this year's NAHB Construction Forecast Conference last week in Washington, D.C.
All eyes are on housing because of fears that rising mortgage interest rates will slow housing so much it could impact the economy negatively. The economy is heating up with core inflation up 2 percent over last year in March. But rising interest rates have some economists expecting gross domestic product to slow down by 3.2 percent in the second quarter, largely due to an anticipated pullback in consumer spending.
According to a report of the conference on The National Association of Home Builders site, NAHB Chief Economist David Seiders believes that other industries will pick up the slack that housing is leaving. "It's pretty clear that the housing sector is in a period of transition," said Seiders.
Along with some other economists, Seiders believes that the Fed will raise short-term interest rates at its upcoming May 10th meeting, the 16th consecutive increase since June 2004, but that the raise should be enough to ease inflationary pressures.
Meanwhile, the NAHB predicts that new home sales will reach 1.13 million units, down 12 percent from 2005's record 1.28 million units, and that 2007 will see about 1.09 million homes sold. "Hopefully, most of this decline will be due to investors and speculators stepping out of the market," said Seiders. "What we don't want to see is investors dumping homes on the market." According to the National Association of Realtors, approximately one-third of homes sold in 2004 were to non-occupying owners and the percentage was higher in 2005.
In anticipation of fewer investors driving the market, home starts will slow this year to 1.59 million units and 1.48 million units in 2007. Correspondingly, home price appreciation will also slow from the 12 percent in 2005 to about 4 percent in 2007, with mortgage interest rates rising.
Expect mortgage interest rates to rise slowly through the end of 2006, but they'll still remain well below historical norms. Most families will be insulated against rising rates because 87 percent of existing loans are fixed-rate. The housing market will continue to correct, not crash and with a little luck, maybe only a few speculators will feel the houses landing on top of them.


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