The housing market is likely to remain weak well into 2008. Inventories of unsold homes, both new and existing, remain substantially above levels that were typical before or during the housing sector boom. The inventory of unsold new homes rose to 9.6 months of supply in December; inventories averaged just above a 4 month supply from 2000 to 2005. The inventory overhang will weigh on both housing prices and construction. Nationwide, home prices are roughly flat over the past year, with some regions that experienced the highest house price appreciation during the boom now seeing outright price declines. Residential investment has subtracted nearly a full percentage point from annualized GDP growth during each of the previous four quarters and looks to remain a drag on the economy into 2008. Housing starts totaled 1.006 million at an annual rate in December, down more than 38 percent from a year earlier, and are at their lowest level since May 1991. Permits for the single-family sector remain below starts, indicating continued future weakness in residential investment. Homebuilder optimism, which is closely correlated with homebuilding activity, is still near a record-low level.The housing market slump and broader economic weakness has contributed to an increase in mortgage delinquencies and foreclosures. New foreclosures jumped to 0.8 percent of all loans serviced in 2007Q3, according to a survey by the Mortgage Bankers Association, totaling slightly more than 350,000 loans in the Q3 survey alone. Subprime adjustable rate mortgages (ARMs) are largely responsible for this trend, but an increase in prime ARM foreclosure starts suggests that credit difficulties are broader than just subprime. Overall, about 1.3 percent of all mortgages serviced in the Mortgage Bankers survey were more than 90 days delinquent in 2007Q3, amounting to nearly 575,000 loans. Foreclosures are expected to rise further as an estimated 1.8 million U.S. owner-occupied subprime mortgages face interest rate resets in 2008 and 2009.
The Administration has taken steps to help prevent avoidable foreclosures and minimize the impact of the housing downturn on markets and the economy. Through FHASecure, the Administration has expanded affordable mortgage options; last fall, the Administration encouraged the creation of the HOPE NOW alliance to reach and help struggling homeowners. These efforts have resulted in progress. According to HOPE NOW, the industry assisted 370,000 homeowners in the second half of 2007, and mortgage servicers modified subprime loans during the fourth quarter at a rate three times faster than in the third quarter.
Working with Congress, the Administration has also temporarily eliminated taxes on forgiven mortgage debt so homeowners facing difficult mortgage situations do not also face adverse tax consequences. The Administration has urged Congress to pass legislation to modernize the Federal Housing Administration, allow states to issue tax-exempt bonds to fund refinancing programs, and undertake comprehensive reform of the housing government sponsored enterprises.
On Thursday, January 24, the President and the bipartisan leadership of the House of Representatives reached agreement on a package of personal and business tax relief to support economic growth while credit and housing markets continue to adjust. Together, the proposal will inject about $150 billion into the economy in 2008, creating over half a million additional jobs by the end of this year. In sum, growth is expected to continue, albeit at a modest pace and with increased downside risks. Rapid enactment of the bipartisan fiscal package would support growth and help to ensure continued economic expansion and job creation in 2008.
