Housing led the U.S. out of seven of the last eight recessions. This time, it may kill the recovery.
Home sales collapsed after a federal tax credit for buyers expired in April. Since then, the manufacturing-led expansion, which began in the second half of 2009, has been waning, with jobless claims rising and factory orders falling.
“If foreclosures continue to mount and depress home prices, that could send the economy back into a recession,” said Celia Chen, an economist who tracks the industry for Moody’s Analytics Inc. “The housing market and the broader economy are closely intertwined.”
Spending on home construction and items such as furniture and stoves accounted for about 15 percent of gross domestic product in the second quarter, according to West Chester, Pennsylvania-based Moody’s Analytics. Real estate also can influence consumer spending indirectly. When values soared in the mid-2000s, people used the boost in equity to pay for cars and vacations. After prices fell, homeowners lost that cushion and curbed spending.
A report tomorrow by the Chicago-based National Association of Realtors will show July sales of existing homes plummeted 12.9 percent from June, the biggest monthly loss of 2010, according to the median estimate of economists surveyed by Bloomberg.
New-home sales, which account for less than a 10th of housing transactions, stayed at the second-lowest level on record last month, economists predict Commerce Department data will show on Aug. 25.
Housing in ‘Doldrums’
“Housing continues to be stuck in the doldrums,” said Jeffrey Frankel, a member of the business-cycle dating committee at the National Bureau of Economic Research, the arbiter of when U.S. recessions begin and end, and a professor at Harvard University in Cambridge, Massachusetts.
With 14.6 million Americans out of work, homeowners are struggling to hold onto their properties. One in seven mortgages were delinquent or in foreclosure during the first quarter, the highest in records dating to 1979, according to the Washington-based Mortgage Bankers Association. Foreclosures probably will top 1 million this year, said RealtyTrac Inc., an Irvine, California-based data company.
Federal efforts to help have had little success. Of 1.31 million loan modifications started under the Obama administration’s Home Affordable Modification Program, 48 percent were canceled by the end of July, the Treasury Department said Aug. 20. More than half of all modifications defaulted again within 12 months, the Office of the Comptroller of the Currency said June 23.
Shadow inventory, or the number of homes repossessed or in default that eventually will be offered for sale, stood at 7.3 million in the first quarter, according to Laurie Goodman, an analyst in New York at mortgage-bond broker Amherst Securities Group LP. As those properties hit the market, prices will come under pressure and buyers will wait for better deals.
“The only thing that’s going to fix the housing markets right now is a work-through of what excess supply is on the markets and improvement in unemployment,” Guy Lebas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, said today in an interview on Bloomberg Television’s “In the Loop with Betty Liu.” “That process is a very, very long-term process.”
On the Sidelines
The sidelined house hunters include Marion and Jim Lasswell, who said they spend most weekends looking at homes for sale near Raleigh, North Carolina. His engineering job at iRobot Corp. is secure, the couple’s credit is good and they have saved enough for a 20 percent down payment, Marion Lasswell said. The problem: they don’t think the market has hit bottom.
“We’re still watching prices drop,” Lasswell, 38, a registered nurse, said in a telephone interview. She said they won’t buy “until there’s an awesome deal.”
Home prices tumbled 33 percent from their July 2006 peak to the low in April 2009, according to the S&P/Case-Shiller 20-city index. They may drop another 20 percent by 2012 if the economy slips back into a recession, according to Chen, the Moody’s Analytics economist.
Gross domestic product increased less than 1.5 percent in the second quarter, the slowest rate since the recovery began, according to the median forecast by economists in a Bloomberg survey. That’s down from the 2.4 percent rate initially reported by the Commerce Department last month. Growth may ease to 1.3 percent by the first quarter of next year, according to the New York-based Conference Board.
‘Epidemic of Thrift
Consumer spending rose 1.6 percent in the second quarter, down from 1.9 percent in the previous three months. Purchases of home furnishings and appliances fell 1.7 percent to an annual pace of $256.5 billion in June from a 2010 high in April, according to the Bureau of Economic Analysis.
“There is an epidemic of thrift,” said Nariman Behravesh, chief economist at IHS Inc. in Lexington, Massachusetts. “Households and businesses are super-cautious right now. Sometime in the next 6 to 12 months, we’ll start to see more movement on home and car purchases and greater willingness on the part of businesses to hire.”
Federal Reserve policy makers on Aug. 10 made their first attempt to shore up the recovery by pledging to keep their holdings of securities and prevent money from draining out of the banking system. They said the economic expansion probably will be “more modest” than earlier anticipated. The Fed has held the target for its benchmark lending rate near zero since December 2008 and purchased $1.43 trillion worth of debt to keep rates low and bolster housing.
“Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth and tight credit,” the Fed said in a statement.
The average U.S. rate for a 30-year fixed mortgage dropped to 4.44 percent in the second week of August, the lowest recorded by McLean, Virginia-based Freddie Mac, the second-largest mortgage buyer. A July survey by the Conference Board found 1.9 percent of the respondents planned to buy a home in the next six months, near December’s 27-year low of 1.7 percent.
A sustained economic recovery depends on the job growth required to boost consumer spending, said Behravesh of IHS. The unemployment rate may average 9.6 percent this year, based on the median estimate of economists in a Bloomberg survey. That would be the highest annual rate since 1983.
Past Not Repeated
Home construction and property sales led the way out of the previous seven recessions going back to 1960, according to PMI Group Inc., a mortgage insurer in Walnut Creek, California. New- home sales improved an average of eight months before the beginning of economic growth, and single-family housing starts improved seven months before recovery.
That didn’t happen in the last recession. Sales of new houses fell in five of the eight months before economic expansion began in 2009’s second half. Housing starts fell in two of seven months.
While the Lasswells in North Carolina said they’ll keep spending their weekends looking at homes, they aren’t in a hurry to buy. “I don’t see things getting better,” Marion Lasswell said. “I expect prices to be flat for a long time.”