Freddie Mac Chief Economist Foresees Slow But Steady Recovery for Economy, Housing

Dees Stribling, Contributing Editor

Schaumburg, Ill.–“Teach a parrot to say ‘supply and demand,’ and you’ve trained an economist,” joked Frank E. Nothaft, chief economist of Freddie Mac today morning at the Lending the Way Housing and Economic Outlook, an event held by Fifth Third Mortgage Co., a subsidiary of Fifth Third Bank, attended by MHN. “You’ve never heard that joke? Every economist has heard it.”

Nothaft, speaking to a full house at the Renaissance Schaumburg Hotel and Convention Center in northwest suburban Chicago, used to joke to hammer home a point about how “excess inventory” helped crater the housing market (single-family and for-sale multifamily) beginning in 2006. During most of the 1990s and into the early 2000s, the sum total of vacant and for-sale residential properties nationwide was roughly a million units at any given time.

“Then beginning around 2005, that inventory shot through the roof,” he said. “At times, it was nearly two million properties vacant or for sale. The markets with the largest inventories have been the hardest hit since then.”

That is, places such as Nevada, whose residential prices declined by 52 percent between 1Q06 and 1Q10, or California, down 40 percent during the same period. Arizona and Florida both lost 38 percent in housing valuation. Nationally, the drop in housing prices in the last four years has been about 20 percent, according to Nothaft.

Considering those figures, and that the country has lost more than 8 million jobs since the end of 2007–and needs even more because of natural population growth–Nothaft noted that both the economy and the housing market have a long road to recovery ahead. Yet he’s optimistic there is a recovery under way, positing that a double-dip recession is unlikely.

“It might not feel like a recovery yet, but it’s under way,” he said. “It’s slow, but it will be sustained.”

By slow, Nothaft explained that unemployment will go down, citing forecasts that put the national rate between 7 percent and 8 percent, but not till 2012. As jobs return, the benefit to the housing industry will be magnified by the highest affordability levels for housing in a generation (higher even than in the early 1970s) and continuing low interest rates, also the lowest in a generation or more. Yet any housing recovery will be one based on the fundamentals of job and income growth, since mortgage underwriting, as Nothaft put it, “is in the hands of responsible lenders these days.”

“Home sales will be better a year from now,” Freddie Mac’s chief economist continued. “There’s going to be a slowdown for much of the rest of this year because of the expiration of the homebuyer tax credit, but sales growth will begin again.”