New data has pushed housing to the forefront of the recovery discussion. Can the economy recover without housing? What has gone wrong with it?
If housing is de-emphasized as never since the Depression, what does it mean for inequality, the new darling of the Left, and the free-market pleasure of the Right?
Other news, quickly: Orders for durable goods sparkled in March, the 2 percent gain doubling the forecast. U.S. manufacturing is hot. Goody. Maybe 18 percent of GDP. Would you like your college grad to work for GM making stuff, or for Google, which makes nothing?
Vladimir the Stupid is in a one-man Mexican standoff. Merkel spoke for the first time in weeks, accusing Vladimir of “imposing his will with the barrel of a gun and force of a mob.” Much as Germany would like to be an overlarge and changeless Switzerland, I think Vladimir has underestimated European resistance. The threat of imminent conflict creates a steady bid for U.S. Treasurys.
As does deflation in Europe, and an ever-closer endgame in Japan, and above all U.S. housing numbers too painful for many to discuss — and those who have tried have gotten it wrong. March sales of new homes, defined as a purchase contract written on a dwelling any time after the building permit, cratered 14.5 percent.
The financial media, led by the Wall Street Journal and Bloomberg News, say the problem is home prices rising too fast and higher mortgage rates. Housing is too important to the nation for old grudges to distort reporting this way. Stock market types hate housing and its competition for client investment, and delight in finding fault.
The real story, one piece at a time:
1. In the U.S., every recovery from recession since World War II has been propelled by housing, specifically the benefit of rising prices, which continue to rise until the next recession. The price-rise loop is so strongly positive that the next recession follows the Fed forced to lean into housing’s inflationary impact. Rising prices create several beneficial wealth effects: Increased equity encourages everything from trade-up to debt payoff to tuition for Egbert. National home prices are today no more than 10 percent up from an overshot bottom, the rise exaggerated by bulk-buying cash-paying cripple-shooters.
2. Mortgage rates are higher than the brief QE3 period near 3.5 percent from mid-2012 to mid-2013. However, that was a refi boon — it did not last long enough for the housing stock to reprice accordingly. We sit at barely 4.5 percent, under the baseline 2009-2011. More important: In each postwar recovery, mortgage rates had to rise a full two percentage points from recession baseline to slow the market.
One financial publication says, “The decline in mortgage lending … stemmed almost entirely from the slide in refinancing. Loans for purchases were basically flat.” Two paragraphs later: “Applications for purchase mortgages last week ran nearly 18 percent below … a year ago.” If you’re going to run propaganda, get it straight.
3. New-home sales provide a minor GDP boost, perhaps 3 percent of total when running hot. The economic propellant to recession escape is home prices. All hot markets across the U.S. are short of inventory, buyers often in auction conditions. How can a minor rise in prices stall construction drowning in demand?
4. The deepest problem with housing today is reverse-circular. In a normal recovery, the drop in mortgage rates unleashes demand. In the aftermath of the Great Recession, too many households are damaged, especially those aged under 40. Inferior replacement of jobs, savings run down, credit damaged, flat wages inhibiting savings.
5. All made worse by credit too tight, especially for two classes of new construction at entry-level: condo and mixed-use.
We’ll see if we can have an accelerating recovery without housing. Households themselves … since the 1930s the one reliable way for a family to build net worth has been the prudent purchase of a home even with little (FHA) or nothing (VA) down, modest discipline and patience.
Remove housing as that vehicle, and young Americans have this option: paycheck savings handed to the stock market.
Lou Barnes is a mortgage broker based in Boulder, Colo. He can be reached at lbarnes@pmglending.com.
