Economist's Commentary: June 17, 2008

Quick Take on the Economy: June 17, 2008

By Lawrence Yun, NAR Chief Economist

New home construction fell 3.3 percent in May and is now off by more than 55 percent from 2005 peak levels.
Single-family units continue their downward path with only 674,000 starts, down 41 percent from just a year ago. Multifamily units fell as well to 301,000 units, which is modestly higher than a year ago.
With home sales weak, apartment construction is holding on.
Housing permits, generally a reliable barometer of future starts, fell for single-family units while posting a mild increase for multifamily units.
With the inventory of homes for both new and existing homes still at very high levels, new home construction needs to fall. The last thing we need in the current environment is more new homes reaching the market.

Inflation faced by producers shows no sign of easing. It rose 7.2 percent from a year ago. It had been rising at around a 3 percent annual average in the 10-year period prior to this year.
Of course, energy and food costs are driving up most of the producer prices. However, even excluding these factors, the core inflation is running at 3 percent, about double the pace of the past 10 years.
High inflation will force mortgage rates to move higher. Lenders want to be compensated for their loss in purchasing power when money is returned. It is critical to get inflation under control in order to maintain favorable mortgage rates.

Factory production weakened in May with a 0.2 percent fall. Compared to a year ago, production is down 0.1 percent - i.e. essentially no change.
In normal good years, production would be rising 3 percent or better.

The economy continues to struggle to move ahead. It is not falling in a measurable way, but still not growing. That means fewer job gain opportunities.
For homebuyers, there will be far less newly constructed inventory to choose from. Jobs will be cut in the construction sector.
Apartment construction is going on at a more or less normal pace.
The Federal Reserve will talk tough about fighting inflation in order to hold down future inflationary expectations. In terms of action, the Fed will not raise the fed funds rate next week nor in August because of the weak economy.

This is one in a series of commentaries by the Research staff of the National Association of REALTORS®. Read more commentaries >

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