The housing slowdown shouldn't last long, and new optimism is to the point that some economists are starting to wonder if the Federal Reserve will start to lower short-term interest rates in 2007 in order to reignite home sales. They are already betting that the Fed will leave rates alone this week when the policy makers meet this Wednesday. Inflation's whipped, they say:

· Housing is on the run. The National Association of Realtors reporting that 2006 may be the first year since 1968 that housing prices fall below the rate of inflation for the year. Housing prices are projected to end the year up 2.8 percent while inflation is expected to be 3.5 percent.

· Gasoline prices are falling. The confluence of events -- hurricanes, possible terrorist attacks, economic embargoes, and other possible disruptions to energy supplies -- that were expected to drive up gasoline prices over the summer never materialized. No hurricanes made landfall, so far, even though some refineries are still offline due to hurricane damage from last year's storms. In fact, some companies are cutting production. The Energy Department says that prices at the pump are about $2.62 from record $3 highs earlier in the summer.

· Consumer prices remained tame. The Labor Department's Consumer Price Index posted a nominal 0.2 increase in August, suggesting that outside of energy and food, core inflation was moderate. Core inflation was 2.8 percent for the year, the biggest gain in nearly five years, so an August easing of prices in air fares to clothing was welcome.

The National Association of Home Builders told Congress last week that the "current downswing in home sales and housing production following the record housing boom of 2004-2005 is expected to bottom out around the middle of next year and gradually move back up toward trend by late 2008."

Listing its reasons for such optimism, the NAHB counted, payroll employment, household income growth, favorable interest rates, readily available mortgage credit, and falling energy prices.

David Seiders, NAHB's chief economist, says he believes home prices will remain relatively flat. "Indeed, some decline is a distinct possibility, and the rate of price appreciation should remain below trend for some time," he says.
But some are keeping their eyes on foreclosures -- one of the first signals that housing is not recovering.

"To this point, generally healthy economic growth and labor markets have kept delinquency rates from rising," explains Doug Duncan, chief economist for The Mortgage Bankers Association. "Going forward we expect some further slowing in the economy and the housing market. As a result, we will see modest increases in delinquency and foreclosure rates in the quarters ahead." This could encourage the Federal Reserve to lower short-term rates instead of raising them.
Says David Lereah, chief economist for the National Association of Realtors, "Mortgage rates are one of the bright spots in the economy right now, with an unexpected decline recently in the 30-year fixed rate to a narrow range around six-and-a-half percent. This should encourage some of the nearly 4 million people who’ve found newly created jobs over the last two years.”