Housing’s Anemic Rebound to Give Little Boost to U.S. Economy
This may be the year the U.S. housing market starts crawling up from rock bottom. Held back by foreclosures, the pace will be so weak it won’t do much for economic growth.
Home prices probably will start to gain in 2011’s third quarter and rise 0.6 percent for the year, the first annual advance since 2006, according to Fannie Mae, the largest U.S. mortgage buyer. Real residential investment, an inflation- adjusted measure of homebuilding, will increase 9.6 percent in 2011 after five years of declines to a record low, based on the median forecast of 30 economists at a Federal Reserve Bank of Chicago symposium last month.
“There’s a good chance of a housing turnaround this year, but it’s not going to be enough to give much help to the economy,” said Karl Case, co-creator of the S&P/Case-Shiller Index that tracks U.S. home prices. “We’re coming off 50-year lows and we still have to deal with the foreclosure mess.”
Housing demand may be stabilizing after transactions plunged last year. Home sales and construction will rise in every quarter of 2011, according to estimates by the Mortgage Bankers Association, the National Association of Realtors, Fannie Mae and Freddie Mac. Lender delays in pushing through foreclosures may be the biggest challenge to a broader recovery, said Mark Zandi, chief economist for Moody’s Analytics Inc.
Bank seizures of homes have tumbled since October, when allegations of flawed affidavits caused lenders including Bank of America Corp. and Ally Financial Inc. to temporarily suspend court actions and review their procedures. Last week, the Massachusetts Supreme Judicial Court upheld a judge’s decision that two foreclosures were invalid because the mortgages were improperly transferred to and from securities.
“The problems that have come to light in the legal process have the potential to cause more foreclosure delays,” Zandi said from West Chester, Pennsylvania. “By the end of this year, the housing crash could be over, or, if we see foreclosures pushed into next year, we might not see a recovery until the end of 2012. It’s very difficult to gauge how it will play out.”
Housing was a driver of economic growth before its collapse led to the worst recession since the 1930s. Residential investment contributed half a percentage point to gross domestic product growth in 2004, an 18-year high that outstripped defense spending, according to Bureau of Economic Analysis data. Last year, inflation-adjusted investment in new homes probably drained 0.17 percentage point from GDP, based on the average of 2010’s first three quarters.
‘Very Small’ Contribution
“The economy probably will see a positive contribution from housing this year, but a very small one,” said Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York. “Even if construction were to decline further, it would only have a small effect because it is such a small share of the economy at this point.”
Sales of existing homes may reach an annualized pace of 5.23 million by the end of the year, up 10 percent from the current quarter, according to a forecast posted on the website of Washington-based Fannie Mae. Existing home sales probably slid to a 13-year low of 4.82 million in 2010, the company said.
Sales of new homes may have dropped to 321,000, the lowest in Census data going back to 1963, the company said. Final numbers for 2010 come out later this month in separate reports by the Commerce Department and the National Association of Realtors.
Affordability and a decline in the inventory of homes for sale will boost demand for housing in 2011, said Joel Naroff, president of Naroff Economic Advisors in Holland, Pennsylvania.
The National Association of Realtors’ affordability index, a gauge of median income against home prices, reached an all- time high of 184.5 in November. The number of new homes available for sale dropped to a 42-year low in that month, while the inventory of previously owned homes on the market fell to 3.7 million, the third consecutive decline, according to data from the Commerce Department and the Realtors group.
“This may be the year we see the beginning of a normal housing market outside foreclosure-overwhelmed areas,” such as California, Arizona, Nevada and Florida, Naroff said. “That doesn’t mean housing is going to be great, because we’re coming off such low levels.”
Foreclosures may also rise. Bank seizures, including home auctions and so-called short sales of properties in default, probably will reach 2 million this year, up from about 1.7 million in 2010, Zandi said. Prior to October’s moratoriums, he had estimated last year’s foreclosures would total 2 million.
Longer to Bottom
“It’s possible we don’t get as many foreclosure sales this year as I’m anticipating, if more sales are delayed by these problems,” Zandi said. “That means it will take longer for prices to reach a bottom.”
Even with the foreclosure crisis, a real estate recovery may accelerate if the world’s largest economy continues to expand, said Case, the co-founder of the home-price index and professor emeritus at Wellesley College in Wellesley, Massachusetts. While housing won’t be much help to GDP this year, gains in jobs and income will expand the number of eligible homebuyers and bolster confidence, he said.
Gross domestic product grew at a 2.6 percent rate in the third quarter of 2010, up from 1.7 percent in the prior period. The unemployment rate fell to 9.4 percent in December, the lowest since May 2009, the Labor Department reported last week.
“If the economic recovery keeps going and unemployment keeps improving, it’s a mood changer,” said Case. “It’s possible we could see people get off the fence and get back into the market.”
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