by Calculated Risk on 11/10/2006 01:31:00 AM

Excerpts from Freddie Mac Chief Economist Dr. Frank Nothaft: Housing and Economic Outlook

Housing starts and sales. Housing starts are expected to continue to decline in the fourth quarter before bottoming out in the first quarter of 2007 at an annualized rate of 1.62 million units. Total home sales are forecasted to average 6.3 million units in the fourth quarter, representing a 20,000 unit decrease from last month's forecast.

The estimate on starts is consistent with the Fed's view of a soft landing for the U.S. economy. I disagree; I think starts will fall much further.

The "total home sales" forecast is confusing. Seasonally adjusted New Home sales are running close to a 1.0 million annual rate and Existing Home sales were at a 6.18 million annual rate in September, for a total SAAR of around 7.2 million in September. A drop to a total 6.3 million seasonally adjusted annual rate would be substantial and doesn't seem consistent with the rest of the forecast.

Home value appreciation. With recent housing market reports showing further weakness in prices of new and existing homes, we cut our forecast of home price growth in the 3rd quarter by nearly 2 percentage points from our October Outlook, to a 3.5% annual rate. House price appreciation is expected to edge down to 2.9% (annualized) in early 2007 and then average 3.3% for the year.

This price forecast almost seems surreal to me. I believe the median home price, as measured by OFHEO, will likely decline in 2007.

Mortgage activity. Given the past increases in mortgage rates, refinance activity continues to be strong due to continued incentives to cash-out home equity and refinance ARMs scheduled to have a payment reset in the next several months. The refinance share of loan applications for the next two quarters is projected to average 44%. Mortgage debt will grow by a rate of 9.1% in the last quarter of this year and drop to 5.8% in early 2007.

I agree that the rate of growth of mortgage debt will slow significantly in 2007. The last time mortgage debt increased less than 6% was in 1995, near the end of the previous housing bust. Once again this seems inconsistent with a forecast for housing starts of 1.62 million in 2007 and prices increasing 3.3% in 2007.