Friday, January 18, 2008

The Perfect Storm

Housing starts dropped 14% in December to an annual rate of 1.006 million, the lowest pace since 1991. Construction fell 25% in 2007, its biggest drop since 1980. Permits dropped to 8.1% in December, and 25% for the entire 2007, the biggest decline since 1974. Construction of single-family homes dropped 2.9%, and multifamily homes dropped 40%. Homebuilders are scaling down construction while they wait for the surplus inventory on the market to sell. Well at least there’s some hope that that will happen. Mortgage rates continued to drop this week, 30-year fixed-rate mortgages averaging 5.69%, the lowest in more than 2 years. 15-year fixed-rate mortgages averaged 5.21%, down from 5.43% last week. 5-year hybrid ARMs carried an interest of 5.40%, compared to 5.63% last week. 1-year adjustable home loans fell from 5.37% to 5.26%. Unfortunately, banks are reluctant to lend money to borrowers. Weak retail sales in December, which dropped 0.4% from the previous month, would suggest that consumers are feeling strapped and unlikely to start house-hunting just yet. This looks like a perfect storm for the economy, and we’ve run out of ideas – and financial innovation.

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