Fed Tilting Housing Market Toward the Brink of Collapse
Today’s report that existing home sales fell 5% during January lends more support to the possibility the housing bubble may not experience a soft landing. The report on existing home sales followed a report earlier this week showing a similar fall in the sales of new homes. Falling sales volume is not the only concern Financial Watch has over the most recent reports on the U.S. housing market. Inventories are at an all-time high and construction continues to occur at a rapid pace. In the coming months even more supply will be put onto a falling market as homebuilders continue construction at a robust pace. At the present pace it will take more than five months to sell the average house. For new home sales this is the highest number since 1996 and for existing homes this is 45% longer than it took just one year earlier.
The mounting signs of a possible collapse of the housing market should cause mass panic at this very moment. Prices continue to remain near their peak established last summer and sales remain above their long-term averages. Significant price drops are only occurring in a few markets that saw very speculative activity during the past couple years. Whether a soft landing can be established in the housing market will depend upon the Federal Reserve. Interest rates will rise to 4.75% in late March. Hopefully this will be the end of the rate hikes. Financial Watch expects the yield curve to remain flat for the foreseeable future. The Fed should be a bit more cautious. A return to a more normal yield curve would push 30-year mortgage rates above 7% and pull the U.S. economy into a recession.
The rapid slowdown in the housing market will impact growth in the coming quarters more than analysts are presently predicting. Economists are predicting for 4.5-5.0% economic growth in the first quarter of 2006 and for housing prices to on average more 6% higher this year. Neither is going to happen. Financial Watch expects growth to be around 3.5% this quarter and decelerate in the coming quarters. Also, we are standing by our prediction that housing prices will move 2-4% lower over 2006. Slowing activity in the housing market will reduce U.S. GDP growth by 0.5-1.0% this year.