by Calculated Risk on 8/29/2007 08:08:00 PM

The following is excerpted with permission from a Goldman Sachs research note on housing: Home Price Declines: Accelerating and Around for a While

Excerpts:

... we expect housing activity to continue to decline as:

Nonconforming mortgage rates are rising and credit is being rationed. Mortgage rates for subprime loans, indeed for all loans that Fannie Mae and Freddie Mac will not purchase, have risen sharply since the beginning of July. Along with this price increase, credit is being rationed as many loans that previously would have occurred are no longer being made. The reduction in credit availability will adversely affect the demand for housing.

Substantial excess supply remains. Perhaps most tellingly, in the second quarter the homeowner vacancy rate was a high 2.6%, far above its long-term average and only slightly below the record level of the first quarter. Furthermore, measures of inventories of new and existing homes remain high, both with nearly 8 months of supply at current sales rates. This excess inventory will require time to be worked off, and while this is occurring will serve as a disincentive to new construction.

Residential investment as a share of GDP is still high. A substantial fall has already occurred, with the share of output devoted to it falling from a peak of 6.3% to 4.9%. But that 4.9% is still above the 4.6% average of the last 30 years and well above lows reached during housing downturns in the early 1980s and 1990s when the share dipped below 3.5%.

Foreclosure rates are increasing. Subprime and Alt-A loans originated over the last several years often called for unrealistic mortgage payments relative to the borrower’s income once mortgage rates reset to higher levels. As these resets have started occurring, delinquency and foreclosure rates on these loans have increased. If even more of these homes enter foreclosure, as appears likely, they will add to the inventory problem outlined above.

The following table shows the GS forecast for key housing indicators - Starts, Prices, New and existing home sales, and change in Residential Investment (RI) - for 2007 and 2008.

		Case Shiller	Home Sales		Housing Starts	Real
		% change,	millions,		millions,	Residential
		end of	annualized		annualized	Investment
		year	New	Existing	Total	% chg
	2006	3.2	1.05	6.51	1.81	-4.6
	2007	-7	0.81	5.77	1.40	-14.7
	2008	-7	0.67	4.90	1.14	-13.3
	2006Q1	n.a.	1.13	6.86	2.13	-0.7
	Q2	n.a.	1.09	6.63	1.86	-11.7
	Q3	n.a.	0.99	6.29	1.70	-20.4
	Q4	n.a.	0.99	6.26	1.55	-17.2
	2007Q1	n.a.	0.85	6.42	1.46	-16.3
	Q2	n.a.	0.88	5.91	1.47	-9.2
	Q3	n.a.	0.80	5.50	1.43	-10.0
	Q4	n.a.	0.70	5.25	1.25	-15.0
	2008Q1	n.a.	0.65	5.00	1.10	-20.0
	Q2	n.a.	0.65	4.90	1.10	-15.0
	Q3	n.a.	0.68	4.80	1.15	-5.0
	Q4	n.a.	0.70	4.90	1.23	0.0

Note: Excerpted with permission.

Notice that GS expects the decline in residential investment to accelerate again. This is exactly what we've been discussing. Also note that GS expects housing starts to decline to 1.1 million seasonally adjusted annual rate (SAAR), existing home sales to fall to 4.8 million SAAR, and New Home sales to 650K (SAAR).