Diane Swonk, Chief Economist
Nov. 18, 2009 – 9:10 a.m. CT
Headwinds in Housing, CPI More Benign than Reported
Housing starts surprised many and slid more than 10% in October. The bulk of the decline was in the multi-family market, which is suffering from some of the tightest credit conditions despite a slip in rates. Condo sales are particularly hard to finance.
A record number of vacancies (more than 10%) in the existing market are another problem, as home buyers have more inventory than ever to choose from.
There may be some hope on the horizon as the first-time home buyer tax credit was recently extended, and given the lag in terms of its impact on sales and new construction, may not have had time to show up (appraisals are coming in particularly low, which is forcing many deals either to fall through or be renegotiated at the last minute).
More disturbing is the surge in apartment and commercial write-offs for Fannie Mae and Freddie Mac, which may be a precursor of losses in the pipeline for the broader credit market. A secondary tightening of credit via commercial real estate losses and the increase in defaults associated with more than 10% is a major risk to the forecast for recovery. Hence the push by the Fed and Treasury to get banks to raise capital today, rather than wait. The hope is to cushion the system against a secondary surge in losses without using additional taxpayer dollars to do so.
Separately, the consumer price index (CPI) edged up slightly more than expected. Higher food and energy costs buoyed the increase in headline inflation. The increase posted for everything from airline fares (tied to increased fees) to vehicle prices, however, is expected to quickly abate. Indeed, the air carriers are already dropping their fares in response to weak holiday bookings.
The Bottom Line: Real GDP growth is rising somewhere in the 3% range – half the pace we should be seeing at this stage of the game – and the risk that we will lose momentum again and slip into a double dip is rising.
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