Rising from the ruins
The housing market still looks grim, but the rental side hints at recovery
Nov 5th 2011 | WASHINGTON, DC | from the print edition
THERE are two things everyone knows about American economic recoveries. The first is that the housing sector traditionally leads the economy out of recession. The second is that there is no chance of the housing sector leading the present economy anywhere, except deeper into the mire. In the two years after the recession of the early 1980s housing investment rose 56%; it is down 6.3% in the present recovery. America is saddled with a debilitating overhang of excess housing, the thinking goes, and as a result is doomed to years of slow growth and underemployment.
The economic landscape is unquestionably littered with the wreckage of the crash. Home prices languish near post-bubble lows, over 30% below peak. The plunge in prices has left nearly a quarter of all mortgage borrowers owing more than the value of their homes; nearly 10m are seriously delinquent on their loans or in foreclosure. The hardest-hit markets are ghost neighbourhoods, filled with dilapidated properties. Housing markets are far from healthy. Yet current pessimism seems overdone. A turnaround in sales, prices and construction may be closer than many imagine.
The potential for a strong housing recovery lies in the depths of the bust. America’s housing boom was remarkable for its impact on prices and for the flow of new households into the market, which pushed the home-ownership rate above 69%, the highest on record. Construction also boomed, but less wildly. Housing completions were above average during the boom, but not unusually so, particularly in light of the relatively restrained growth in housing supply during the 1990s (see chart 1). The bust, by contrast, dragged new construction to unprecedented depths. At the current rate, fewer homes will be added to the housing stock this year than in any year since records began in 1968.
America therefore has only a minor problem of excess housing supply. Under normal conditions, that small glut would quickly have disappeared in a bust on the present scale. But America is now adding new households at a rate well below normal—not because the population is growing more slowly, but because, for example, young people are opting to stay longer in their parents’ home. According to one analysis, there are now 1.5m more young adults (aged 18 to 34) living at home than would be expected, given long-term trends. Thrift imposed by a sickly economy is probably the principal cause. Better prospects for young adults would encourage the forming of new households, buoying the demand for new homes.
Although total housing supply is not far out of line, the distribution of supply between the rental and owner-occupied markets remains distorted. In September the inventory of newly built houses for sale fell to its lowest level since record-keeping began. But the inventory of existing houses, while falling, remains high. In September the figure dipped below 3.5m, down from over 4.5m in 2008 but still above the 2.5m registered early in the last decade. The total number of vacant homes for sale has steadily declined and is at the lowest level since 2006. But the pace of sales remains extraordinarily low, and foreclosures will continue to prevent a faster decline in inventory.
Rental markets, by contrast, look far stronger. America’s rental vacancy rate stood at 9.8% in the third quarter of 2011, down from a high above 11% in 2009. Vacancy rates in some cities are strikingly low—2.4% in New York City, for instance, and 3.6% in San Francisco—which translates into rising rents. Nationally, rents rose 2.1% in the year to August, in stark contrast to house prices (see chart 2).
Strength in the market for rentals is beginning to seep into the more troubled owner-occupied sector. Rising rents help housing markets heal on both the supply and demand side, by encouraging renters to consider buying and through the movement of supply into the rental market, easing the glut of houses for sale. The Obama administration hopes to take advantage of better rental conditions to unload some of the more than 200,000 foreclosed-on homes held by the two government-sponsored mortgage giants, Fannie Mae and Freddie Mac, and the Federal Housing Administration (which account for roughly half of all such inventory), on to investors who may rent the properties out.
Rental-market strength is also rousing a long-dormant building industry. New housing starts rose 15% from August to September of this year, driven by a 53% surge in new structures containing five units or more. In the three months to September construction employment rose by 29,000 jobs. The sector is still some 2.2m jobs below its pre-recession peak, and new hiring there would help a dismal labour market.
A stranglehold on lending
The convalescence, however, may be complicated. Housing recoveries have seemed imminent before, only to peter out when the economic outlook weakened. Foreclosures are falling, but they continue to place downward pressure on prices. New proposals from the administration aim to help underwater borrowers refinance, but more lavish assistance for troubled borrowers is too politically unpopular and expensive for Washington’s taste.
The macroeconomic environment, too, remains troublesome. Housing markets could lurch sharply downwards if a new shock, perhaps from Europe, disturbed the global economy. A new financial shock could rattle confidence and send buyers fleeing, while the flow of mortgage credit from exposed banks would dry up. Lenders carry the scars of the housing crash. Cautious banks are reluctant to lend. Housing-finance institutions, having kept credit standards too loose during the bubble, now seem to be setting them too tight, preventing rising demand and low rates from translating into new sales.
Yet once the housing sector finds its footing it may quickly gain momentum. A switch from falling to rising prices should encourage banks to make more loans. Higher house values would chip away at negative equity, stanching the flow of defaults and foreclosures.
A new analysis by Goldman Sachs argues that housing can “punch above its weight” in recoveries. Rising house values boost confidence and spending, and home construction is more labour-intensive than other sectors. A housing recovery should also give monetary policy more traction; low interest rates do less to perk up the economy when housing markets are depressed. Indeed, the Federal Reserve is considering nudging recovery along by buying mortgage assets, which should ease the flow of credit to borrowers.
Such hopes for housing would smack of an effort to reanimate a corpse, had the bust not so far outpaced the boom. But a turnaround now seems probable on many measures. If it happens, the recovery should become much more vigorous.
from the print edition | United States
It could be worse
Nov 4th 2011, 13:14 by R.A. | WASHINGTON
IN THE first week of September of this year, the Bureau of Labour Statistics reported that amid the wild gyrations of August the American economy added precisely zero net new jobs. Job creation had apparently ground to a halt, and a double-dip into recession seemed more likely than not. Relative to those dismal expectations, the labour market’s recent performance has proved a pleasant surprise. Yet the economy has a very long way to go to return to full employment, and it’s getting their painfully slowly.
In the month of October, nonfarm payroll employment rose by 80,000 jobs—less than economists expected. The report was less disappointing than might be imagined given that number, however. The initial zero-job figure from August has now been revised up to an increase of 104,000, and September’s total has also been revised up, to 158,000. That pace is scarcely enough to keep up with population growth, but it’s considerably better than the economy managed in the early summer.
Private payroll growth remains the driver of job creation. Private payrolls increased by 104,000 jobs, offsetting a decline of 24,000 jobs from the government sector. Since employment hit bottom in early 2010, the economy has added a total of 2.3m jobs. The private sector has added 2.8m workers while the government has sacked half a million.
Private job growth was driven by rising professional and business services employment, education and health services employment, and retail employment, with a little help from durable goods manufacturing.
Encouraging signs are tucked throughout the report. According to the household survey, employment rose by 277,000 in October, outstripping growth in the labour force and bringing the unemployment rate down a notch to 9.0%. Broader measures of underemployment also dropped, along with the number of long-term unemployed. The employment-population ratio ticked up slightly, as did hours worked and average earnings.
Yet as one notes and appreciates the direction in which these variables are moving, it’s impossible to ignore the levels at which they stand and the slow pace of change. The unemployment rate is still 9%, three full percentage points above the Federal Reserve’s upper estimate of the natural rate. Payroll employment remains over 6m jobs below the pre-recession employment peak, and stands at roughly the level of April of 2000, over a decade ago. At the rate of job growth experienced over the past three months, the economy will return to its previous peak in just under five years. It will have been a lost decade.
Worst of all, it remains far from certain that the American economy can keep even this tepid pace for the next five years. Europe is in recession and on the brink of catastrophe, Congress is incapable of action, and the Fed remains well behind the curve. The global economy can scarcely go three months without experiencing a negative shock of one sort or another. Things could be far worse and they’re getting better. They remain a long way from good, however.