Business Outlook: Housing Demand Stabilizes

Just as the housing collapse has played an outsize role in the recession, a housing turnaround will be crucial to a recovery in the broader economy. In both 2007 and 2008 the direct effect of the housing slump subtracted about one percentage point from overall economic growth, and the drag in the first quarter of 2009 was 1.4 points. That doesn't include the indirect losses of housing-related jobs, spending, and consumer wealth. Recent signs that housing activity is at least stabilizing are a milestone. Just removing the heavy downward pull on growth will be an important first step toward an upturn in the overall economy.

Any housing revival will follow the typical path of past recoveries: Improving sales will lift new construction, followed by a firming in prices. This process is finally starting, but the headwinds are still fierce. Record affordability is offset by tight credit and rising unemployment. Builders see demand improving, but not fast enough to unload the bulk of their inventories. And foreclosures continue to put homes back on the market, keeping intense downward pressure on prices.