Freddie Mac: April Housing Market Report Warns of Over-Supply

In the April 2007 Economic Outlook issued by Freddie Mac, the growing inventory of new homes is a major factor that will have to be overcome.

Not only is the inventory at a 16-year high relative to the sales pace, but this official inventory does not reflect the cancellation of new home sales contracts which several large builders reported ran at around 30 percent of all contracts signed last year.

The Outlook speculates that these anomalies in the data may actually account for the recent downturn in new home sales.

Overall, it is far too early to decide that the housing market is out of the woods. The subprime mess may affect home sales if large numbers of buyers find out they can not qualify for a mortgage and foreclosures may dump more houses onto the market. Even if demand does increase, the remaining excess supply will hold back price appreciation and even lead to price declines in some local markets.

As to specifics, the Office of the Chief Economist makes the following points:

• Mortgage rates will average 6.2 percent this year and 6.4 percent in 2008. This is 10 basis points lower than Freddie Mac had predicted in the March Outlook.

• Builders reacted quickly to the declining market and housing starts are off more than 30 percent from one year ago. Once excess inventory is sold off, housing starts will turn around. The estimate is for 1.56 million housing starts for new mortgage applicants this year.

• Home sales seem to have stopped declining and are expected to increase later this year. Total home sales are projected to average 6.44 million this year and 6.49 million next year.

• Home prices will post their smallest gain in several years and will finally fall into line with other parts of the consumer economy. Prices are expected to rise 2.5 percent this year and 3.2 percent next; this means now is the perfect time to consider a home purchase loan.

• Home mortgage refinancing will remain strong this year and next but, with many families moving to fixed rate mortgages from ARMs the numbers of refinances will slow in future years.

• As far as adjustable-rate mortgages are concerned, Freddie has revised downward its estimates of their market share to 11 percent in 2007 and 13 percent in 2008. The historical market share of these products has averaged 29 percent since 1985.

SOURCE: Mortgage News Daily