Housing Keeps Improving ... That's Good for Future Economic Growth

Anybody that has been alive the past several years knows that housing has been in the tank.

Home prices have dropped by roughly one third, and home sales have plunged to levels not seen for decades.

As a result, we experienced a deep recession and the current economic recovery has been made weaker than usual because of the housing collapse. In addition, foreclosures have been high and banks have suffered huge losses on loans, causing a further tightening on granting new mortgages.

Finally, government agencies such as the FHA, Fannie Mae, and Freddie Mac have recorded losses in the billions of dollars, thereby making taxpayers exposed to unexpected future losses as well. Not a pretty sight.

In sum, the housing "hole" is a deep one and it will take many more years to get back to what we used to refer to as normality with respect to home sales and prices.

However, and despite all the bad news, there is now increasing reason to be optimistic about the future and that we've seen the worst for housing. Things are improving.

Housing starts highest in more than four years has today's good news story:

"Construction on new homes rose in October to the highest rate in more than four years, government data showed Tuesday, in another sign of a strengthening U.S. housing market.

Housing starts rose 3.6% last month to a seasonally adjusted annual rate of 894,000, the highest rate since July 2008, the U.S. Department of Commerce reported. Starts are up 42% from last year, though the rate remains far below a bubble peak of almost 2.3 million in 2006. . . .

By region, October’s starts fell by 6.5% in the Northeast (largely the Hurricane Sandy effect) and by 2.5% in the South, while rising 8.9% in the Midwest and increasing 17.2% in the West.

Meanwhile, building permits, a sign of future demand, hit a rate of 866,000 in October, down 2.7% from September, but up 30% from the prior year. Permits for single-family homes rose 2.2% in October to an annual rate of 562,000, while permits for structures with at least two units fell 10.6%....

 

Housing adding to economic growth

The surprisingly strong report led analysts with Macroeconomic Advisers, a St. Louis-based research firm, to raise their estimate for economic growth in fourth quarter by one-tenth of a percentage point to 1.3%.

“Single-family housing starts and permits were above expectations for October, suggesting more residential investment in the fourth quarter,” Macroeconomic Advisers analysts wrote in a research note.

Housing construction will “add modestly” to economic growth for the next two quarters, analysts at New York-based RDQ Economics wrote in a research note.

“However, with residential investment’s share of GDP at 2.7%, which is only half the share seen over the decade prior to the financial crisis, the impact on growth is likely to be only moderate,” according to RDQ analysts.

Housing gaining strength

Tuesday’s report is the latest data showing a housing market gaining strength. Home prices are on the rise. Also, existing-home sales are up nearly 11% from last year, while sentiment among home builders stands at the highest in more than six years, according to reports released Monday. Read more on home sales.

While permits declined in October, they are up 30% from last year — permits rose 27% for single-family homes and a whopping 41% for structures with at least five units. Meanwhile, starts for single-family homes are up 35% from last year, while starts for structures with at least five units are up 63%. . . .

Indeed, record-low interest rates and an economy that is adding jobs are supporting the housing market. However, while low rates are attracting some buyers, borrowers still face tight credit conditions.

And despite recent gains, the housing market remains far below peak levels, with millions of workers still unemployed. About one-fifth of mortgage borrowers are underwater, Federal Reserve Chairman Ben Bernanke noted in a recent speech.

However, with rising house prices and household formation, Goldman Sachs economists say they expect housing starts to reach a rate of 1.5 million by the end of 2016. "

SUMMING UP

Housing is recovering. That's the good news.

But housing activity remains in a very deep hole compared to historical results. That's the bad news.

My guess is that we'll not see a return anytime soon to the "good old days" of housing, and if so, that will be a very good thing. Hopefully, we won't repeat the mistakes of the past for a very long time, if ever.

During the bubble, we borrowed, built, refinanced, spent, and then borrowed, built, refinanced and spent some more. What began as "good days" later turned into the "bad old days" of the housing bubble.

Now we're all living with its consequences and they're not pretty. Taken as a whole, the good old days were bad old days

All that said, housing is finally improving on all fronts, and that is for real a very good thing. It speaks well for our U.S. economy's ability to continue to strengthen in the months and years ahead.

And there are more reasons for optimism as well.

As we produce more of our own energy needs and take steps to get our country's financial 'house' in order, we will be positioned for solid growth for many years to come.

Especially if we quickly come to understand and accept that the private sector must play a leading role in providing enough jobs for a lasting and solid economy.

So let's try to be impatiently patient as the economic recovery slowly unfolds and life gets increasingly better for We the People.

Thanks. Bob.