Existing home sales retreated again last month, falling by nearly 17% in February on an annualized basis, the Census Bureau reports. That’s the biggest monthly fall since last May. Although all regions of the country suffered declines, the heavily populated Northeast section of the U.S. posted the steepest drop with a 57% tumble.
The positive spin is that it’s merely the weather mucking up the trend. A variation on this view is that the housing market may not be poised for recovery, but it’s not headed for a new downturn either. "We do not believe the housing sector is on the verge of renewed contraction," Michelle Girard, an economist at RBS in Stamford, Connecticut, tells Reuters. "Rather, we continue to expect the recovery in housing to be disappointingly and frustratingly slow."
The question is whether the distinction is meaningful in terms of the economic cycle. It’s a subject worth thinking about when you consider the positive role that housing’s played in every previous recovery cycle since 1970. Sales of new single-family homes began rebounding during every recession of the last four decades. In each case, by the time growth was established and the recession was over (based on NBER cycle dates), new home sales had more or less climbed back to levels posted when the contraction began. Within a year of every economic rebound’s start, new home sales were clearly rising at a robust year-over-year gain. A similar story describes the dynamic for new housing starts.
This time is different. The deep recession in housing showed signs of recovery last year, but it’s looking more like a dead-cat bounce these days vs. a bonafide revival in the fortunes of residential real estate. Comparing the annual pace of change for housing starts and new home sales on a rolling basis suggests a renewed decline this year isn't beyond the pale. It’s debatable if this drag on the economy threatens the modest rebound in the labor market and other sectors of the economy. The good news is that the broad trends for job growth and industrial production (a proxy for the overall macro trend) remain positive ... so far, at least.
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“Housing is a mainstay of the U.S. economy, consistently accounting for more than one fifth of the gross domestic product (GDP),” writes Alex Schwartz, chairman of the New School’s Department of Urban Policy Analysis and Management, in his book Housing Policy in the United States
Does that matter for the year ahead? Maybe not, according to the optimists, who say that housing’s negative aura will be minimal for the economic recovery. Let’s hope that’s true, since expectations for a strong rebound, or any rebound in residential real estate, appear muted at best.
"Overall, the sentiment among our expert panel regarding the U.S. housing market outlook continues to deteriorate," warns Robert Shiller, chief economist of MacroMarkets, via the firm’s March 2011 Home Price Expectation Survey. "Now they are expecting only a weak recovery, and even that is not until 2013. This uninspiring view must be influenced by the persistently weak market fundamentals -- high unemployment, supply overhang, an unabated foreclosure crisis, and constrained mortgage credit."