Housing Recovery Dependant on Inventory Reduction

Dennis Norman

Housing is stabilizing but excess inventory and shadow supply are hindering recovery according to the April 2010 Economic Outlook released today by Fannie Mae’s Economics & Mortgage Market Analysis Group.

The report projects that new home sales (which are at record lows) will be slow to recover until inventory of existing homes and the foreclosure overhang are worked off. The comments about existing home sales were more optimistic saying key indicators for existing home sales, including pending home sales and purchase applications, are showing good signs of a pickup.

Jobs, a driving force for housing, are now moving in the right direction according to the report. Fundamentals of the labor market appear to be improving as layoffs have slowed and hiring is showing signs of life. March payroll employment increased by 162,000, the largest gain in three years; temp employment posted a sixth consecutive monthly gain; and the average workweek increased. On the downside, unemployment will remain elevated for some time, despite the peak unemployment rate of 10.1 percent likely having occurred in October 2009.

Highlights of the housing forecast contained in the report:

  • The rate of new home starts is projected to increase from quarter to quarter throughout 2010 and 2011
    • New home starts for 2010 (single family) are projected to come in at 570,000 homes and in 2011 856,000 homes
  • The rate of sales of new homes is also projected to increase from quarter to quarter throughout 2010 and 2011 as well.
    • New home sales are expected to come in at 374,000 in 2010 and 612,000 in 2011 (Fannie Maes 2010 estimate is more optimistic than my estimate of 336,600 – 355,000 homes)
  • The rate of existing home sales is expected to increase in the second quarter this year but then drop back down in the third quarter and finish 2010 with 5,464,000 homes sold. For 2011 existing home sales are projected to improve slightly toward the end of the year finishing 2011 with 5,946,000 existing homes sold.
  • Median home prices are expected to decrease 1.0 percent from 172,500 for 2009 to $170,800 in 2010 and then increase by $600 to $171,400 in 2011.
  • Interest rates on fixed-rate mortgages are projected to increase from 5.04 percent for 2009 to 5.23 percent in 2010 and 5.69 percent in 2011.
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