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Housing Market More Important Than Ever

Irwin M. Stelzer

The housing market and house prices are the economy’s gift to journalists. For one thing, almost everybody either owns a house, is looking to buy one, or to sell one – and all want to know whether prices are going up, down, or sideways, whether buyers are in the saddle and ride sellers, or vice versa. The endless cocktail party chatter includes such serious stuff as whether higher interest rates will slow down sales (yes, other things being equal, which they never are), and such inane stuff as a seller, who bought a house for $400,000, one year later put it on the market for $500,000 before accepting an offer of $480,000, complaining about his $20,000 loss.

Right now in America forecasters are more than ever focused on the housing market, hoping it will boost a recovery that seems to be on pause or, if pessimists are to be believed, about to reverse. This flaccid recovery, the least vigorous since WWII, specializes in false dawns, as millions of job seekers well know, and as retailers were reminded in January and February. Which makes the housing market more important than ever. It can create or kill jobs in construction and in the production of appliances and furniture. And rising house prices drive up wealth and confidence, key drivers of the hoped-for resumption of growth in the 3+ percent range. It is not quite the case that as housing goes so goes the economy, but a robust recovery is unlikely without a growing housing sector.

All signs point up, unless they point down. Prices in December rose at their fastest rate since May, and two much-watched indexes recorded fourth-quarter increases of 7.7 percent (Federal Housing Finance Agency) and 11.3 percent (Standard & Poor/Case Shiller) compared with last year. Both are eight-year highs. Equally cheering, new home sales in January surprised forecasters who were expecting a fall-off; they jumped 9.6 percent. And bank lending for land development and construction is rising from 2013’s 14-year low. “A welcome departure from recent downside surprises,” according to economists at Goldman Sachs. All of which has prompted economists at the National Association of Home Builders to predict that single-family home starts this year will increase by 33 percent.

Builders’ joy is not unconfined. Most do not believe that the red-hot sales and price performance of the recent past will be repeated this year. Some developers are selling land to lock in their profits from shrewd purchases in depressed times, in anticipation of a switch from a sellers’ to a buyers’ market. Brad Stiehl, an estate agent with the Realty One Group, tells me that “buyers are not feeling the pressure to make an immediate offer lest they get out-competed for a property, as was the case a few months ago.” He adds that buy-to-let-to-flip investors who only recently snapped up lower-priced houses have retired to the side-lines, leaving that inventory to first-time buyers who find interest rates attractive even after the recent rise. At the middle and upper ends of the market, “neither buyer nor seller is in control; it’s a healthier, more normal market.” But one in which builders such as Toll Brothers are finding willing buyers for their more expensive models: in the quarter that ended in January, Toll-built homes netted 21 percent higher prices on average than they had in the same period a year earlier.

That might have changed in recent weeks. Higher interest rates seem to be causing a drop in new contracts. Glen Kelman, CEO at Redfin, a national brokerage, notes that a mortgage payment that came to $1,600 per month last year is now $2,000. Add to that the decline in affordability attendant on the rapid increase in prices last year, and you have reason for caution – a deceleration in price rises and a slowing of sales growth, or worse, an actual decline in sales and price.

Neither would be good news for the economy, already beset by a downward revision of fourth-quarter GDP, from 3.2 percent to 2.4 percent, and a January decline in industrial production, the first since last summer, and in the output of consumer durables such as cars and appliances. Although bad weather seems not to have markedly affected house sales, serial storms might account for some of the drop in industrial production. Paul Dales, senior U.S. economist at Capital Economics, told the Wall Street Journal there is “a growing list of economic [data] releases affected by the unusually bad weather.” But Anil Makhija director of one of Ohio State University’s research centers, has a different story, “It’s a copout to worry about the weather. … There was underlying softness absent weather conditions.”

My own view is that the effects of the bad weather ranged from nil in housing to significant in autos Рperhaps because workers excused from showing up had time to trudge around looking at houses, but were not likely to test drive a new car in a foot of snow. And the effects will range from permanent to temporary: airlines are not likely to make up revenues lost due to cancellations of business and pleasure travel, or natural-gas-consuming industries to recover their higher costs, but the lust for a new garden hose or a beautifully painted house cannot be permanently cooled by a blizzard. Which is why the chief financial officer of Home Depot, Carol Tom̩, guesses that at least some of the $100 million in weather-related lost sales in January will be made up in the spring when homeowners add the repair of snow damage to gardening, house painting and other chores.

In the end, much of the economy’s performance will depend on, among other things:

  • Consumers’ confidence, which dipped a bit last month but remains above the year-end 2013 level.
  • Consumers’ balance sheets, which are strong due to rising share and house prices and the paying down of debt.
  • The availability of credit both to consumers and businesses, which availability is increasing as banks become more confident that they will be repaid now that the worst of the recession is past.
  • The effect of Federal Reserve Board policy, which will continue to keep interest rates at growth-inducing levels, and I suppose.
  • The weather, with a sunny spring doing wonders for retailers.

As for housing, George Hunt, an analyst at Wells Fargo, put it best, “Growth has slowed to a more normal pace, and we expect the recovery [in the housing market] to continue for several more years.” Unless … but let’s hold that until next week’s job report.

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