Thursday, February 16, 2012

Residential Construction: Still Dragging

The Lehmann Letter (SM)

It's not that this morning's news was bad. The Census Bureau reported an improvement in January housing starts:

But it's not hard to see the problem when you post January's 699,000 on the chart. We're breaking out of the 600,000 range, but not by much.

Housing Starts
(Click on chart to enlarge)

(Recessions shaded)

Contrast this with our earlier report of 14.1 million new-vehicle sales in January. Place that on the chart and you can see the positive trend.

New-Vehicle Sales
(Click on chart to enlarge)

(Recessions shaded)

What's wrong with housing? Why can't it break loose like so many of the other indicators we watch? These are important questions because the economy can't recover fully without a resurgence in residential construction.

Federal Reserve Chairman Ben Bernanke spoke to this issue on February 10 before a meeting of the National Association of Home Builders in Orlando, Florida.

You can find his remarks at:

Here are some key excerpts. They are worth reading because they succinctly summarize the issues.

“The state of the housing sector has been a key impediment to a faster recovery. In the typical economic recovery, a resurgent housing sector helps fuel reemployment and rising incomes. But as you know all too well, that scenario has not played out this time….

“One way to understand conditions in the housing market is to focus on the balance of supply and demand. For the past few years, the actual and potential supply of single-family homes has greatly exceeded the effective demand….

“Looking ahead, the relatively high rate of foreclosures is likely to continue for a while, putting additional homes on the market and dislocating families and disrupting communities in the process….

“Additionally, housing may no longer be viewed as the secure investment it once was thought to be, given uncertainty about future home prices and the economy more generally….

“As I mentioned earlier, problems in the housing market have also restrained the broader economic recovery. For example, by some estimates, declines in house prices have reduced homeowners' equity by more than 50 percent in the aggregate since the peak of the housing boom, resulting in more than a $7 trillion loss of household wealth.4 Indeed, about 12 million homeowners--more than 1 out of 5 with a mortgage--are underwater, meaning they owe more on their mortgages than their homes are worth. One of the effects of declines in housing wealth is to reduce the ability and willingness of households to spend…

“One reason for the very slow recovery in mortgage credit, despite monetary policy actions that have helped drive mortgage rates to historically low levels, is that many lending institutions have tightened underwriting conditions dramatically, relative to the pre-recession period.”

There you have it:

The economy can't recover fully until housing recovers. But housing is a key asset in household balance sheets. Its depreciation has significantly reduced household wealth. Moreover households don't expect an improvement any time soon. Meanwhile lenders have tightened loan standards. Under these circumstances how can we expect households to burden their balance sheets with the mortgage borrowing required to restart residential construction on the scale required to rekindle boom conditions?

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© 2012 Michael B. Lehmann

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