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Feds Cut GDP Expectations on Cooling Housing Activity

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Members of the Federal Open Market Committee (FOMC) in their March meeting revised down their expectations of gross domestic product (GDP) growth because of a leveling off in housing activity, according to minutes released today. Weak state and local government spending, as well as substantially reduced household income in the second half of 2009, also contributed to the FOMC's downward projections. Despite government interventions, housing remains a key concern in the US. For example, housing starts remained flat while investment in nonresidential structures declined since the Fed's last meeting. "[A]ctivity in the housing sector appeared to be leveling off in most regions despite various forms of government support, and … commercial and industrial real estate markets continued to weaken," FOMC said in the meeting minutes. "Indeed, housing sales and starts had flattened out at depressed levels, suggesting that previous improvements in those indicators may have largely reflected transitory effects from the first-time homebuyer tax credit rather than a fundamental strengthening of housing activity." Foreclosures rates are likely to remain high in coming quarters, according to the FOMC. The likelihood of additions to the already large inventory of vacant homes also poses downside risks to home prices. Adding to the weak real estate outlook was the fact that the delinquency rate on commercial mortgages in securitized pools increased in January, and the delinquency rate on commercial mortgages at commercial banks rose in Q4 2009. Kansas Federal Reserve Bank president Thomas Hoenig once again voted against keeping the target for the federal funds rate so low “for an extended period,” suggesting instead to keep rates low “for some time,” giving the FOMC flexibility to begin raising rates modestly. He said such an adjustment to the target for the federal funds rate should be made sooner rather than later, to reduce longer-run risks to the fragile financial stability so far. Write to Diana Golobay.

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