Weak Housing Market Leads to Anemic Recovery

Weak Housing Market Leads to Anemic Recovery

As Published in the Fall 2012 Edition of NJ Lifestyle

The most recent recession (often dubbed “The Great Recession”) was the longest and most severe recession in the United States since The Great Depression in the 1920’s. Officially, the recession began in December 2007 and ended in June 2009, at which point the economy started to grow again. What has been concerning to so many is that usually by this stage of a ”recovery”, U.S. GDP would be growing at 4-6%, based on historical measures. Instead, the U.S. economy is barely generating 2% growth presently.

Although there are many factors contributing to this lackluster recovery, perhaps the largest factor has been the weak housing sector. It is, of course, intuitive that housing would be weak in a recovery following a recession that was caused by a “housing bubble.” The years leading up to 2007 were marked by excess housing construction, speculation, and poor lending practices. The excess housing supply created by the housing bubble has caused new home construction to slow down dramatically from historic averages. Over the last 40 years, the United States has produced, on an annual basis, approximately 1.5 million new housing starts. This number decreased all the way to 500,000 in 2010.

The good news is it appears the housing market has bottomed. Home prices appear to be stabilizing nationally, and many metropolitan areas have started to see year over year appreciation. As of July 2012, we are back to an annual pace of approximately 750,000 new housing starts. While that seems like good growth, it still leaves us at half the long-term average.

The National Association of Home Builders (NAHB) estimates that for every new home constructed, three to four jobs are created. That means that when housing starts reverting to normal activity, it could convert to approximately 3 million new jobs in the construction and related industries. These are jobs sorely needed in an economy that has had unemployment north of 8% for the past four years. However, even though it appears that housing has bottomed, it could take years to get back to a more normalized market due to:

  1. Foreclosure: The number of houses in or soon to be in foreclosure is still too high to have a robust housing market
  2. Unemployment: It is tough to see a robust housing market with unemployment still above 8% nationally.
  3. Under-water homeowners: Most of the people who buy brand new homes are not first home buyers. Millions of Americans owe more on their home than the properties are currently worth. Until this improves, which will only do so with the passage of time, you have a limit to home sales and new construction. It doesn’t appear to us that housing is going to take off anytime soon. Although Americans would like to see a robust housing market and lower unemployment, some problems just have to work themselves out over time. The federal reserve has given us some of the lowest borrowing rates in history. Unfortunately, the problems that plague housing have more to do with excess supply and excessive home debt levels than interest cost. Our belief is the supply and demand forces in the housing market must balance out, and that takes time.