by Calculated Risk on 3/22/2006 12:02:00 PM

David W. Berson and Molly Boesel, Fannie Mae economists, write: Economic & Mortgage Market Developments. Here are some excerpts on housing:

Housing: Home sales continue to ebb, with even slower activity likely.

Both new and existing home sales continued their downtrend through January, despite warmer-thannormal weather that typically would have boosted sales. Local real estate groups in many housing markets are reporting additional sales declines, increases in unsold inventories, and even price drops. Moreover, leading indicators of home sales point to slower activity in coming months. Purchase applications data from the weekly Mortgage Bankers Association (MBA) survey fell in February to the lowest levels in two years, while the monthly builder survey from the National Association of Homebuilders (NAHB) was unchanged in February at the lowest level since 2002.

• New home sales fell by 5.0 percent to 1.23 million units (seasonally adjusted annual rate, or SAAR) in January, the lowest level in a year. Despite the ongoing decline in sales, actual sales in January were still up by 1.1 percent from a year ago.

• Total existing home sales (single-family plus condos/co-ops) fell by 2.8 percent to 6.56 million units (SAAR) in January. Actual sales in January were 2.9 percent less than a year ago.

• Helped by warm weather, total housing starts jumped by 14.5 percent to 2.28 million units (SAAR) in January. Both single-family and large (five or more units) multifamily starts rose, but there was a modest decline in starts for structures with two-to-four units.

• After surging to meet the needs of hurricane evacuees, manufactured housing shipments fell to 167 thousand units (SAAR) in January, the lowest level in four months.

And their predictions:

Housing Outlook: Less investor activity and lower affordability will slow the pace of home sales in 2006, while home price gains slow sharply.

Although job/income growth and demographics are expected to remain positive for housing this year, the decline in affordability over the past couple of years (caused by surging home prices) and a sharp pull-back of investor demand should cause sales to fall. We project a decline of nearly 9 percent for total home sales in 2006 (somewhat less for new sales and starts, somewhat more for existing sales), bringing sales down to 7.61 million units. This would still be the third-strongest year on record for home sales.

Although we don’t expect much of a rise in 30-year FRM rates, ARM rates should continue to increase as the Fed tightens monetary policy. Housing affordability declined significantly over the course of 2005, and rising mortgage rates (along with even higher home prices in many areas) should push affordability down a bit more. More importantly, we expect investor demand for housing to fall sharply from the record share of 2005. Fortunately, continued job and income growth as the overall economy grows around trend rates will partially offset the big decline in housing activity that otherwise would occur. Moreover, the age-structure of the population and the surge in the number of immigrants over the past 25 years will continue to put upward pressure on owner-occupied housing demand. Taken together, these components of housing demand suggest the modest decline in our outlook, rather than something more severe.

This falloff in housing activity, and the resulting slower home price gains, won’t be uniform across the country. Those areas with the strongest regional economies should continue to see positive in-migration and housing demand. But, those areas that have had the strongest investor demand are at risk for sharp declines in housing demand – as well as the potential for significant increases in the supply of homes for sale. As a result, overall home price gains are projected to slow sharply in 2006 – down to only 2.5-3.0 percent after a couple of years of double-digit growth. And in those areas with the biggest falloff in investor demand (and the largest corresponding rise in inventories of homes for sale), there is a risk of home price declines – especially in those markets without strong job gains to help offset investor selling.