Is Housing in Trouble, Again?

 |  Includes: IYR, REZ, RWR, RWX, XHB
by: James Picerno

Is the housing recovery losing steam? It’s harder to dismiss the possibility after reading yesterday’s update of the S&P/Case-Shiller Home Price Indices. Nationally, U.S. housing prices fell 2.0% in this year’s third quarter over the previous three months. That’s a sharp deceleration from the 4.7% rise in this year’s second quarter.

Looking at national housing prices on a rolling annual basis doesn’t brighten the trend. As the chart below shows, U.S. home prices overall in September were 1.5% lower compared with 12 months ago. “While housing prices are still above their spring 2009 lows, the end of the tax incentives and still active foreclosures appear to be weighing down the market,” S&P advises in a press release.

click to enlarge

By some accounts, it all adds up to a humbled outlook for real estate in the foreseeable future. Housing “is on the brink of another substantial downturn,” warns Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott. “Supply far exceeds demand and the only remedy is further price declines,” he says via Bloomberg.

Even the ailing labor market is doing better than housing. No one will confuse the modest gains in net private nonfarm payrolls this year as a robust recovery, but the trend at least remains positive.

Not so for housing, according to the latest Case-Shiller numbers. If housing is faltering once again, there will be repercussions. As Professor Alex Schwartz reminds in his book Housing Policy in the United States, “Housing is a mainstay of the U.S. economy, consistently accounting for more than one fifth of the gross domestic product.”

If housing is in fact destined for a new downturn, the debate will be largely over how deep the damage. As Christopher Low, chief economist at FTN Financial, reminds via Reuters: "As far as consumers go, housing's not quite as significant as it used to be, but there is still a wealth effect. Falling home prices, for a lot of people, means that their wealth is eroding."

Ongoing housing weakness inspires rethinking some of the recent optimism tied to the uptick in markets and several non-housing corners of the economy. Was the autumn revival merely a headfake? It’s too soon to say for sure, but yesterday’s housing update has injected a new strain of anxiety into the debate about what comes next.

At the very least, the latest dip in the Case-Shiller national index creates more pressure for good news in the next batch of economic reports. The crowd needs encouraging data points to temper the disappointing housing update. The rest of the week won’t disappoint for fresh macro meat to chew on, for good or ill, starting with today’s updates on the ISM Manufacturing Index, construction spending, auto sales, and ADP’s estimate of payrolls for November. Thursday brings word of last week’s tally of new jobless claims.

The big number arrives on Friday when the government publishes its nonfarm payrolls report for last month. The consensus estimate calls for a gain of 140,000, according to Will that be enough to calm the bears and steady the bulls? Stay tuned.