A housing boom in 2012? Not so fast.
How far is the U.S. housing market from a full recovery? Pretty darn far: “House prices would need to increase by at least 14%, real residential investment would need to increase by at least 50%, and housing starts would need to grow by at least 80% from current levels to restore long-run equilibrium,” according to a new report from the Carlyle Group.
Even so, the private equity giant is still sanguine about the housing market’s recovery. Though most analysts agree that it will rebound at some point over the next few years, the Carlyle Group believes that it will happen faster than expected. It predicts that housing construction and renovation will boost economic growth in 2012--a true “boom” that could even protect the U.S. economy from a downturn in Europe or sharp drop in consumer spending.
The Carlyle Group cites a couple of factors that are fueling its optimism. First, fixed residential investment--that is, new housing construction and renovations--was responsible for almost 10 percent of economic growth in the fourth quarter of 2011. By comparison, falling residential investment reduced the gross domestic product by an average of 0.7 percent over the past five years, Carlyle calculates. What’s more, the firm points out that home-building stocks on the S&P 500 have outperformed the rest of the market, concluding that there’s greater optimism than may appear for home construction.
But the firm may be underestimating the huge obstacles still holding back the housing recovery in 2012. It argues that home construction (and prices) will invariably rebound once it becomes more expensive to buy an existing property than construct a new one. But it’s not clear whether that will happen any time soon.
Housing starts have picked up somewhat since the bust, but they’re a long way off from getting back to even historic averages. While things aren’t getting perilously worse, we could be stuck in low gear for a long time, going well beyond 2012.
“Of course we will be building more homes at some point, but nothing here indicates that date is 2012 or even 2013,” says Dean Baker, co-director of the Center for Economic and Policy Research, pointing out that vacancy rates have in fact reached new record highs.
There’s a huge overhang that doesn’t show many signs of dissipating this year, at least: The huge number of vacant and foreclosed properties have kept housing prices at historic lows and deterred potential homebuyers, and there’s a vigorous debate as to whether housing prices have even hit bottom yet. “The argument that house prices will have to rise based on the ratio of market value to replacement costs ignores his own data, which shows large periods where it has been below the current ratio,” Baker adds.
What’s more, it’s unclear whether home ownership will even return to pre-housing boom levels, given the psychological and economic aftershocks of the recession. Young people are becoming less inclined and less able to buy their own homes, as Derek Thompson explains. One Cleveland landlord reports as much in his own building, where the vacancy rate has reached a decade-low. “Four years ago, tenants were leaving as if a siren was blasting in the hallway,” Bert Stratton writes in a New York Times op-ed. “They have lost faith in the homeownership dream, at least for the moment. They’re sticking with rental.”
Certainly, even a very modest improvement in the residential investment would help the economy, and we may finally be at the beginning of a housing recovery. But Carlyle’s expectations that 2012 could mark “the start of a housing boom” seems premature. Even when you focus on fixed residential investment, it’s clear how far we have to go. Though we may not drop farther, the extraordinary circumstances surrounding the housing meltdown mean that the market could remain stagnant at a low, rather than turn around any time soon: