The next thing out of his mouth will be Quantitative Easing, Round 3.
Headlines like this are in the news this week: “The U.S. finally has moved beyond attention-grabbing predictions from housing “experts” that housing is bottoming. The numbers are now convincing.”
And this: “Nearly seven years after the housing bubble burst, most indexes of house prices are bending up. “We finally saw some rising home prices,” S&P’s David Blitzer said a few weeks ago as he reported the first monthly increase in the slow-moving S&P/Case-Shiller house-price data after seven months of declines.”
Housing starts rose 6.9 percent to a 760,000 annual pace after a revised 711,000 rate in May that was faster than initially estimated, the Commerce Department reported today in Washington. The median forecast of 79 economists surveyed by Bloomberg News called for a 745,000 rate. Which means they were off by 2%. I don’t think this grounds for celebration.
Nearly 10% more existing homes were sold in May than in the same month a year earlier, many purchased by investors who plan to rent them for now and sell them later, an important sign of an inflection point. In something of a surprise, the inventory of existing homes for sale has fallen close to the normal level of six months’ worth despite all the foreclosed homes that lenders own. The fraction of homes for sale that are vacant is at its lowest level since 2006. Which means nothing since the 2006 number was normal, and banks have been holding on to property that they have foreclosed in order to not flood the market and drive up inventory.
In other words, these numbers are completely manipulated by the banking industry in an attempt to normalize the markets.
“Even with the overall economy slowing,” Wells Fargo Securities economists said, cautiously, in a note to clients, “the budding recovery in the housing market appears to be gradually gaining momentum.”
Housing is still far from healthy despite the Federal Reserve’s efforts to resuscitate it by helping to push mortgage rates to extraordinary lows: 3.62% for a 30-year loan, according to Freddie Mac‘s latest survey. Single-family housing starts, though up, remain 60% below the 2002 pre-bubble pace. And, by the way, try qualifying for a mortgage these days. Ha!
Americans‘ equity in homes is $2 trillion, or 25%, less than it was in 2002 and half what it was at the peak, in 2006. More than one in every four mortgage borrowers still has a loan bigger than the value of the house, though rising home prices are reducing that fraction very slightly.
Still, the upturn in housing is a milestone, a particularly welcome one amid a distressing dearth of jobs. For some time, housing has been one of the biggest causes of economic weakness. It has now—barely—moved to the plus side. “A little tail wind is a lot better than a headwind,” says economist Chip Case, the “Case” in Case-Shiller.
From here on, housing is unlikely to be the leading drag on the U.S. economy. It will instead reflect the strength or weakness of the overall economy: The more jobs, the more confident Americans are about keeping their jobs, the more they are willing to buy houses. “Manufacturing had led growth and construction had lagged,” JPMorgan Chase economists said last week. “Now the roles are reversed: Manufacturing growth has slowed as private construction comes to life.”
Unfortunately, as we see fewer jobs, all of the new construction will result in a huge inventory of new homes and further bloat an already bloated market.
The biggest threat is that large shadow inventory of unsold homes, homes which owners won’t put on the market because they are underwater, homes that will be foreclosed eventually and homes owned by lenders. Another threat is the holdback that the banks have been managing around homes already in foreclosure, so as to not flood the market. They have been trickling onto the market, slowed in part by government efforts to delay foreclosures; a flood could reverse the recent rise in prices. Or the still-dysfunctional mortgage market could get even worse.
Don’t believe what you read, folks. The housing bust is far from over.