By Neil Irwin
Washington Post Staff Writer
Thursday, September 23, 2010; 8:38 PM
The collapse of the housing sector was a major driver of the nation's economic woes. Now, a new wave of weakness in housing poses risks to the fragile economic recovery.
Fresh data released this week offer a portrait of a residential sector that is muddling along at low levels, though nothing resembling the freefall of 2006 to 2009. On Thursday, the National Association of Realtors said that sales of previously owned homes rose 7.6 percent in August - a disappointing result, as analysts had hoped for a stronger bounce back after sales tumbled 27 percent in July.
That followed a report Tuesday that builders started work on more new homes than had been expected in August, a 10.5 percent rise, and data issued Wednesday indicating that home prices fell 0.5 percent in July.
Taken together, housing - which on balance contributed to economic growth from late 2009 through the early months of 2010 - is now emerging as a neutral force at best, and could drag down an already weak growth outlook.
The good news is that housing has shrunk so much as a portion of the economy that even another dip in the sector would probably not be enough, on its own, to throw the nation back into recession.
But it is an industry that nonetheless has significant influence on the economy. Home prices affect people's perceptions of how wealthy they are, and hence affect consumer spending; prices also help determine how much money banks lose when they foreclose on a house, and therefore new weakness in housing could ripple through the financial system; and home sales activity, besides providing income to real estate brokers, also tends to coincide with spending on furniture and other items.
"I don't look at housing as a dramatic headwind for the economy, but I also don't think it's going to lead us out of the slump, either," said Mike Larson, a real estate analyst at Weiss Research. "Housing will be a sector that is stuck in the mud for some time while we work off excess inventory, but the impact on overall growth even if housing were to fall is a lot smaller than it was a few years ago."
Builders normally pull back on home construction during a recession, and when a downturn ends, there is pent-up demand for houses and construction activity spikes. In that sense, housing can be a key driver of economic recovery.
But this is no typical recession. The downturn was preceded by vast overproduction of housing until about 2006, and that excess is still being worked off, in part through foreclosures. There is little reason to think that builders will need to rapidly increase production to keep up with demand.
Builders started work on housing units in August at a 598,000 annual rate, well above the levels of early last year, but still below the 1.3 million new housing units that are needed annually to keep up with the rate of population growth. However, with the job market weak, the rate of household formation appears to be running below that long-term trend rate, as people are more inclined to live with family members than they would be if they had better employment prospects.
But with more homes vacant than usual, and a steady stream of foreclosures arriving on the market, there is still ample housing even without much construction occurring. The National Association of Realtors said Thursday that there was an 11.6-month supply of homes on the market, twice as long as would be seen in a seller's market.
And that doesn't account for the "shadow inventory" - houses that are not actively on the market, but will be once they work through the foreclosure process or whose owners will sell as soon as prices show hints of rising.
Understanding the state of housing is particularly difficult now because of the homebuyer tax credit that expired in the spring. Home sales activity collapsed in the immediate aftermath of the credit's expiration, including the 27 percent drop in July sales of existing homes. So recent gains probably represent more of a yo-yo effect from the change in tax policy than an indicator of underlying strength in housing.
"The only good thing to say about housing is that the numbers are going to get better, but the numbers are so awful right now that getting better isn't saying much," said Patrick Newport, an economist at IHS Global Insight.