Moribund Housing Market Threatens to Kill Economic Recovery

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The weak housing market, which has traditionally led the U.S. economy out of recent recessions, this time may put an end to the economic recovery.

Existing home sales plummeted by a record 27% to their lowest level in 15 years in July and inventories soared, the National Association of Realtors (NAR) reported yesterday (Tuesday). Home re-sales, which account for 90% of the total market, dropped to an annual rate of 3.83 million in July. And inventories rose to 12.5 months from 8.9 months in June, putting them at their highest level in more than a decade.

"Historically, July is the peak inventory month in any given year," NAR Chief Economist Lawrence Yun told The Wall Street Journal. "The question is whether this pause is a temporary pause."

Purchases will be "soft for at least two more months as the housing market works through the effects of the end of the tax credit," he said.

Many analysts said the drop, more than twice what analysts' projected, shows a lack of jobs threatens to undermine the U.S. economic recovery.

"If foreclosures continue to mount and depress home prices, that could send the economy back into a recession," Celia Chen, an economist who tracks the industry for Moody's Analytics Inc., told Bloomberg News. "The housing market and the broader economy are closely intertwined."

Spending on home construction and accoutrements like furniture and appliances accounted for about 15% of gross domestic product (GDP) in the second quarter, according to West Chester, Pennsylvania-based Moody's Analytics.

Home prices tumbled 33% from their July 2006 peak to the low in April 2009, according to the S&P/Case-Shiller 20-city index. If the economy falls into a double-dip recession, they may drop another 20% by 2012, according to Chen.

In its latest forecast the Federal Reserve scaled back its economic projections, saying it expects the soft job market to continue to hold back economic growth.

Fed Bank of Chicago President Charles Evans said that while the housing market and U.S. economy have made progress, a sustained economic recovery isn't yet guaranteed.

"Although there are some signs of general economic recovery and some evidence of home-price stabilization, we are certainly not out of the woods," Evans said in a speech in Indianapolis, Bloomberg reported.

With 14.6 million Americans unemployed, homeowners are struggling to make their mortgage payments. One in seven mortgages were delinquent or in foreclosure during the first quarter, the highest since 1979, according to the Washington- based Mortgage Bankers Association.

The number of bank-owned homes that will eventually hit the market stood at 7.3 million in the first quarter, according to Laurie Goodman, an analyst at mortgage-bond broker Amherst Securities Group LP. As those properties come to market, economists fear it will put further pressure on already depressed prices, prompting buyers to wait for better deals.

"The problem with housing is there's actually a lot of shadow inventory," Constance Hunter, chief economist at Aladdin Capital Management LLP in Stamford, Connecticut told Bloomberg. "The Fed must enact a second quantitative easing strategy."

The central bank recently said it would increase its purchases of assets like Treasury securities to pump up the money supply and ease credit. The housing report combined with a disappointing rise in unemployment claims may prompt the Federal Reserve to consider additional moves to boost the economy.

A sustained economic recovery depends on the job growth required to boost consumer spending. The unemployment rate may average 9.6% this year, based on the median estimate of economists in a Bloomberg survey. That would be the highest annual rate since 1983.

Home sales collapsed after a federal tax credit for buyers expired in April. Since then, the economic expansion, which began in the second half of 2009, has been fading, with jobless claims rising and factory orders falling.

The government's Home Affordable Modification Program has met with little success. Roughly 48% of 1.31 million loan modifications started under the program were canceled by the end of July, the Treasury Department said Aug. 20. More than half of all modifications defaulted again within 12 months, the Office of the Comptroller of the Currency said June 23.

"The only thing that's going to fix the housing markets right now is a work-through of what excess supply is on the markets and improvement in unemployment," Guy Lebas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, told Bloomberg Television. "That process is a very, very long-term process."

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