Lately, various housing-market metrics such as existing-home sales, new-home sales, and mortgage applications have all been flagging. We also recently learned that the U.S. homeownership rate was at a 19-year low, and some experts think it will never come back.
There’s little doubt that the unusually harsh winter weather and last summer’s mortgage rate spike are partly to blame for the recent weakness. As such, Goldman Sachs’ Sven Jari Stehn and David Mericle expect a “rebound in the short term.”
But in a new research note to clients, the economists go ahead and cut their outlook for housing investment and GDP forecast. From their note:
We see a number of reasons, however, for a somewhat less upbeat view of the underlying trend in housing activity.
First, our analysis … suggests that housing activity received a significant boost from falling mortgage rates between mid-2011 and mid-2013. On average, our model suggests that declining mortgage rates boosted growth in residential investment by almost 5 percentage points during this time. As this tailwind dissipates going forward, the trend in housing activity might be somewhat lower than previously assumed.
Second, mortgage credit availability remains tight. The latest Fed Senior Loan Officer Opinion Survey indicates that banks have slightly tightened mortgage lending standards this year, despite rising house prices and very low levels of mortgage defaults (Exhibit 5). Likewise, the average credit score on mortgages used to purchase homes has only edged down slightly over the past year.
Finally, recent data raise questions about the strength of the recovery in household formation. While the annual data on household formation from the Current Population Survey point to a solid gain in 2013, the monthly household formation numbers from the Housing Vacancy Survey show a weaker recent trend.
Perhaps the most surprising of the three points is the second point. Indeed, we’ve heard plenty recently about how lending standards have loosened and credit scores for borrowers have fallen.
But relative to the early 2000s, things are still very tight.
This is not to say that banks “should” loosen standards to the levels that inflated housing bubble. All it says is that banks “aren’t” lending like they once did.
“Given these headwinds, we are trimming our forecast for residential investment from 13% to 7.5% and from 12.5% to 10% in 2014H2 and 2015H1, respectively,” wrote Stehn and Mericle. “As a result we are shaving our forecast for real GDP growth by 1⁄4 percentage point to 31⁄4% in 2014H2.”
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