INSIGHT: Housing recovery is threatened by slowing economy

30 August 2012 16:31  [Source: ICIS news]

By Joe Kamalick

Nascent housing recovery could pull US economy alongWASHINGTON (ICIS)--The long-depressed US housing industry may at last be in recovery, according to recent indicators, and real estate sector officials have reaffirmed predictions for a home-building takeoff this year and gaining altitude in 2013.

That improved outlook for the crucial US housing sector assumes, however, that the nation’s still wobbly economic recovery gains some strength in the second half this year and that the eurozone sovereign debt crisis doesn’t go into full meltdown and drag other economies with it.

Within the housing industry, things are definitely getting better, even if gains over the last year have been spotty and mixed with some monthly downturns in one or another of the key indicators.

US housing starts have been improving, sales of new and existing homes have shown gains, especially if measured against year-ago levels. 

Perhaps most significantly, pending home sales – considered a reliable forward-looking indicator – have shown more or less steady advances recently.

Pending home sales rose in July, the National Association of Realtors (NAR) reported this week, reversing a downturn seen in June and reaching the highest level of activity in more than two years.

The association said that its pending home sales index (PHSI) rose to 101.7 in July, a gain of 2.4% from the June reading of 99.3.

Like other housing market indicators, the pending sales measure has bounced around in recent months – up in March (101.4), down in April (95.5), ticking up again in May (100.7), shaving a point off in June (99.3) and then reaching up again in July.

Taking the long view, the July index of 101.7 marked a 12.4% improvement from the same month last year when it was at 90.5.

A residential property sale is listed as “pending” when a contract has been signed but the transaction has not been closed and funded with a mortgage loan. A pending sale usually closes within a month or two of contract signing.

The association's pending sales index is seen as a reliable, forward-looking indicator for near-term expectations in the US housing sector.

The index is measured against the 100 baseline set by the NAR in 2001 to represent an average or healthy pace of pending home sales contracts.

Lawrence Yun, chief economist at the association, noted that the July index of 101.7 is at the highest level since April 2010 when it was 111.3.

But that comparison with April 2010 is a bit misleading.    

In that month of 2010, an unusual number of home buyers moved into the market to take advantage of a federal tax credit for residential property purchases which expired at the end of April. 

Consequently, the April 2010 pending sales data were, given the times, disproportionately high. When that tax incentive lapsed, pending home sales and other housing indicators later fell anew.

Yun noted that while the pending home sales index has seen ups and downs since the first of this year, the overall trend is on the upside.

“While the month-to-month movement has been uneven, more importantly we now have 15 consecutive months of year-over-year gains in contract activity,” Yun said.

He said that existing home sales “are expected to rise 8% to 9% in 2012, followed by another 7% to 8% gain in 2013”, and that “home prices are expected to increase 10% cumulatively over the next two years”.

Yun predicted that even with a 30% improvement in home construction this year and a further 50% gain in housing starts next year, there will not be enough new homes available to meet housing demand, meaning that existing home sales will likely see strong gains as well. 

NAR spokesman Walter Molony said that in Yun’s analysis, US population growth and pent-up demographic demand should push US existing home sales into a normal range of 5m units by next year – “if all conditions were optimal”.

Therein lies the rub.

Ironically, just as the US housing sector is finally showing a stronger pulse, the broader US economic recovery is growing faint.

US gross domestic product (GDP) growth was at a downright cheerful 4% (annualised) in the fourth quarter of 2011, but then dropped to 2% in the first quarter and then eased further to a revised 1.7% pace in the second quarter.

The nation’s economy is still growing, no mistake, but the pace is weak and the downward trend in the GDP data is worrisome.

In normal times, the US economy would be expected to expand at 3% to 3.5% annually, but a GDP growth rate of under 2% cannot generate enough new jobs to lower the nation’s unemployment rate, which rose slightly to 8.3% with the most recent jobless report for July.

Both consumers and businesses are holding back on spending, manufacturing has entered a period of contraction, consumer confidence has fallen to its lowest point since late last year, a Congress study warns that a new recession is probable in early 2013, and the IMF said that the eurozone crisis has reached a new and critical stage.

The question is whether a housing sector recovery can help strengthen the broader US economy – as it did in earlier post-recession recoveries – or will the long-awaited housing revival be jeopardised or even halted by further weakening in the overall economy.

The folks at NAR look on the bright side.

Molony said that the association’s economists are forecasting flat US GDP growth in the third quarter of 1.7%, same as the second quarter, then a gain to 2.1% in the last three months of this year before gathering strength with the new year for growth of 3% or better for 2013.

We may find out soon if that optimistic outlook will prove true.

At the end of next week, 7 September, the US Labor Department will issue a critical report on the nation's employment and jobless rates for August. If those numbers show another uptick in unemployment, however miniscule, they could trigger still more negative trends for the broader economy.

When the unemployment rate inches up, those still employed become worried about the security of their own jobs, so they tend to save more and spend less, chilling the economy still further.

Then on 26 October, just eight weeks away, the Commerce Department will issue its first estimate for US GDP growth for the third quarter.

If those data show the nation’s economy still running on idle with growth of 2% or less, that could well dash hopes for a real recovery in the housing market – and likely mean a new tenant for the White House as well.

Paul Hodges studies key influences shaping the chemical industry in Chemicals and the Economy

By: Joe Kamalick
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