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Near-Term Forecast for U.S. Housing Sector A Tough Task: St. Louis Fed's Poole


ST. LOUIS — Forecasting the near-term prospects for the U.S. housing sector has been a "tough task" in recent years, said William Poole, president of the Federal Reserve Bank of St. Louis.

Poole's comment came in a speech to the Regional Chamber and Growth Association.

Poole elaborated by noting that "Since 2002, forecasters have significantly underestimated the growth of real residential fixed investment—the main indicator of the strength of the U.S. housing sector. "For instance, in December 2004, the consensus of the Blue Chip forecasters was that real residential fixed investment would decline by about 3.25 percent in 2005," Poole said. "Instead, such investment rose by about 7.5 percent. Currently, forecasters are once again expecting housing activity to modestly detract from real GDP growth in 2006. But this time, as noted in the minutes of the Federal Open Market Committee (FOMC) held on Jan. 31, 2006, even policymakers are now expecting some weakening in housing construction." Poole said that, to some extent, growth nationally will be influenced by the pace of ongoing rebuilding in the Gulf Coast areas ravaged by Hurricanes Katrina, Rita and Wilma last year.

Poole said that nationally, recent surveys of consumers suggested a "marked increase in reticence" by consumers to purchase a home. "My hunch, though, is that housing activity will stabilize and remain at a high level this year," said Poole. "I base this forecast on the belief that the FOMC will keep underlying inflation low and stable and that the growth of real household income will recover nicely due to the waning influence of last year's spike in energy prices. Continued healthy job growth will also help keep housing conditions at a high level. That said, some slowing in the growth of average home prices nationally seems a reasonable expectation at this point."

Poole said there is "substantial variation" in the appreciation of real house prices around the country, and that his Eighth Federal Reserve District is no exception. "For example, from the first quarter of 2000 through the fourth quarter of 2005, Springfield, Mo., Little Rock, Ark., and Louisville, Ky., appreciated by 14, 14 and 11 percent, respectively. This compares with a 26 percent increase for St. Louis but gains of less than 8 percent for Jefferson City, Mo., and Memphis, Tenn. As a result, if St. Louis has experienced a modest appreciation compared to the coastal regions, other metro areas in the Eighth District have experienced even less real appreciation."

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