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Fannie Mae Sledgehammers Housing Forecasts

You’d think the housing market is in fine shape, based on the sizzling optimism of our home builders. The National Association of Home Builders just released its Housing Market Index, which rose to 55 in August – above 50 means that more builders view conditions as good than poor. It was the third month in a row of gains, and the highest level since January.

All three components of the HMI rose: current sales conditions to 58; future sales – that’s where optimism thrives – to 65, the highest since August 2013; and traffic of prospective buyers to 42. OK, so foot traffic was crummy. That’s what “42” means. But in the prior month, it was 39, even crummier. Hence, renewed optimism.

That all three components rose three months in a row “is a positive sign that builder confidence appears to be firming following an uneven spring,” said NAHB Chief Economist David Crowe. This feat was due to “sustained job growth, historically low mortgage rates, and affordable home prices, which are helping to unleash pent-up demand.”

Yup, “affordable home prices” and “pent-up demand!” Not to mention “sustained job growth,” of jobs that pay enough to buy a home.

US-homebuilders-HMI-v-Housing-starts_2007-2014Home builders have become an optimistic bunch in 2012. As housing starts were ticking up a smidgen, builder optimism as measured by the HMI began to surge, and except for a couple of dives, including during the harsh winter this year, has continued to surge. As the chart shows, the HMI (blue line, left scale) has soared even as the puny growth in housings starts (red line, right scale) petered out in 2013. And they remain mired down at about one-third of the level where they’d been during the bouts of peak optimism.

But the NAHB’s electronic ink wasn’t even dry, so to speak, when the ever optimistic Fannie Mae, the bailed-out government mortgage giant, came out with its August 2014 forecast, in which it took a sledgehammer to its prior forecasts.

Home sales have been plunging for months, after post-crisis optimism peaked mid last year. And Fannie Mae is adjusting to an ugly reality.

It slashed its 2014 forecast for construction starts for single-family homes to 642,000 units, down 8% from its July forecast of 696,000. But it has been slashing its forecasts all along: in January, it had still seen 768,000 single-family housing starts in 2014. And inAugust last year, it had forecast 876,000 starts. It has now chopped 27% off that forecast.

Same thing with home sales.

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