Although housing is beginning to stabilize, excess inventory and shadow supply may hinder continued recovery, according to the April 2010 Economic Outlook released Monday by Fannie Mae's Economics & Mortgage Market Analysis Group.
Fannie Mae said recent major housing indicators have been harsh. Housing starts fell in February, led by a large drop in multifamily starts. In addition, single-family starts fell slightly and have basically moved sideways during the past 6 months. Hovering near an annualized level of 500,000, single-family starts remained well above their record low reached in February 2009 but are significantly below their record high of more than 1.8 million annualized rate recorded in February 2006.
According to the outlook, lackluster homebuilding activity is one of the reasons for a relatively modest recovery. However, given soft demand for new homes, a much-below trend level of activity is necessary to restore balance to the housing market. The fourth consecutive drop in new home sales in February brought sales to another record low.
Existing home sales posted their third consecutive drop in February, but Fannie Mae said the near-term outlook is brightening, as augured by improving leading indicators of home sales. Pending home sales, which measure contract signings of existing homes, surged in February, and purchase applications have risen nearly 25 percent in
the last six weeks. As a result of these positive indicators, existing home sales are projected to strengthen substantially in the second quarter.
The homebuyer tax credit, set to expire later this month, is expected to pull sales forward into the first half of this year. As a result, Fannie Mae said sales will likely fall back in the third quarter. And if the labor market improves substantially in the fourth quarter as anticipated, home sales should rebound and begin a self-sustaining recovery without the help of a tax subsidy.
Even with an expected gain in March, total home sales for the first quarter are likely to be much lower than originally projected, causing Fannie Mae to downwardly revise the trajectory of sales going forward. For all of 2010, Fannie Mae projects a 6 percent increase in sales, down from a 9 percent increase forecast in the March outlook and a 12 percent increase projected in the February outlook.
As for home prices, Fannie Mae expects to see more moderate declines this year. However, the shadow inventory of homes continues to pose risks. In the minutes from the March Federal Open Market Committee meeting, committee members expressed concerns that the foreclosure rate could remain elevated or even surge higher in coming quarters. Consequently, this could potentially add supply to the already large inventory of vacant homes, posing downside risks to home prices.
However, Fannie Mae said two recent initiatives by the administration to address rising delinquencies and stem foreclosures, if successful, will help reduce shadow inventory. These include Federal Housing Administration financing of underwater mortgages and an enhancement to the Home Affordable Modification Program to address principal write-downs and unemployed borrowers.
It will be some time to determine how effective the programs will be in reducing strategic defaults and the shadow supply of housing, but Fannie Mae believes these measures will reduce downside risks to the housing market.