Current Conditions

Housing Activity

New home sales declined sharply in November, reaching the slowest sales pace since April 1995.  In continuing with its trend of downward revisions of sales in previous months, the Census Bureau revised down sales in October and September a total of 34,000.  Year-to-date sales were 25.4 percent lower than sales in the first eleven months of 2006.

Total existing home sales edged up in November.   The November increase, albeit small, is the first in nine months.  Year-to-date sales of single-family homes were down 12.2 percent from those in the first eleven months of last year.  Year-to-date sales of condos were 9.3 percent lower than those last year.

Single-family starts fell in November for the eighth consecutive month, reaching the lowest level since April 1991, while multifamily starts edged up.  Single-family starts have declined considerably over the past year, with year-to-date single-family starts 28.1 percent lower than those in the first eleven months of 2006.  Year-to-date multifamily starts with 5 units or more were 5.8 percent lower than those last year.

Inventory

For new homes, the number of homes available for sale dropped 1.7 percent to 505,000 -- the eighth consecutive monthly decline.  With a sharp drop in sales and only a modest decline in inventory, the months’ supply (or the inventory-sales ratio) surged to 9.3 months from 8.8 months in October. 

For existing homes, the number of total homes available for sale fell 3.6 percent from October.  (The data are not seasonally-adjusted.)  From a year ago, inventory was up 12.1 percent.  The increase in the sales pace and declining inventory pushed down the months’ supply to 10.3 months from 10.7 months in October.  The months’ supply for single-family homes was 9.9 months, compared with 7.1 months a year ago.  The months’ supply for condos edged down was 12.7 months, rising from 9.2 months in November 2006. 

Home Prices

The median price for new homes continued to be volatile, edging up 0.4 percent in November from a year ago, following a year-over-year decline of 8.3 percent in October.  The median price for single-family existing homes fell 3.7 percent in November from a year ago, following a 6.7 percent decline in the previous month.  The median price for condos edged down 0.7 percent from last November -- the first drop in six months.

Housing and Mortgage Market Projections:

Leading indicators of home building activity suggest a continued decline in starts.  Permits fell 1.6 percent in November, with single-family permits dropping 5.6 percent.  This marks the eighth consecutive monthly decline in single-family permits, which reached the lowest level since June 1991.   Builders’ sentiment -- which incorporates current and future sales expectations -- remained at a record low in December for the third consecutive month.

The spread between the 10-year Treasuries and the 30-year fixed rate mortgage yield widened to 200 basis points in December.  The spread between the yields on jumbo mortgages and conforming mortgages stayed around 80 basis points during the same period.  Both of these spreads are wider than their historical norms and we expect that the wider than normal should discourage some housing activity for the coming quarters.

Below are our projections for the rest of this year and next:

• We expect housing starts and home sales to continue to trend down and reach bottom around the second half of 2008. 
  
  
• Total existing home sales for 2008 will decline by about 13 percent from 2007 to 4.94 million units.  Sales will pick up by about four percent in 2009.
  
  
• New home sales will decline by about 15 percent in 2008 from 2007 to 666,000 units.  We expect sales to increase about seven percent in 2009.
  
  
• Median home prices for new and existing homes are expected to decline this year, with median prices falling about two percent.  Prices should increase by between one and two percent in 2009.
  
  
• Residential purchase mortgage originations will decline about 18 percent in 2008 to $955 billion from a projected $1.16 trillion in 2007.  Given a recovery in sales and prices in 2009, purchase originations should be up by five percent to one trillion in 2009. 

• The yield on 10-year Treasuries -- the benchmark for fixed rate mortgage yields -- are projected to decline in the current quarter as the Federal Reserve is expected to continue with its easing.  However, we do not expect a large pickup in refi activity as we would normally do for several reasons.  First, lending standards have been tightened significantly.  Second, the spread between the 10-year Treasury yield and conforming mortgage rates as well as the spread between conforming mortgage rates and jumbo rates has widened.  Third, home prices have declined in many areas.  These factors have combined to discourage some refi activity, especially in areas with relatively high share of jumbo loans and falling home prices.  Thus we project that refinance originations will decline about 14 percent to $1.01 trillion in 2008 from a projected $1.17 trillion in 2007.  Refi activity will decline by another 13 percent to $883 billion in 2009 from 2008.
  
  
• Total mortgage production will be down 16 percent to $1.96 trillion this year from a projected $2.34 trillion in 2007.  This would mark the first time since 2000 that total mortgage originations fall below $2 trillion.

• Total originations should see another drop of four percent in 2009 to $1.88 trillion.