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The Housing Theory of Everything

Posted by: Ben Steverman on February 25, 2008

The stock market reacted strongly to new numbers on existing home sales on Feb. 25. That reaction caught my attention, because it seemed bizarrely out of proportion to some flimsy, mediocre data.
It’s yet more evidence for a “housing theory of everything.”
Here’s the theory: The extent to which U.S. home prices fall will matter more than almost any other economic statistic this year.

Good news on bond insurers likely caused stock’s late-day rally on Feb. 25, but it was the home data that seemed to lift stocks out of negative territory early in the day. Existing home sales fell 0.4% in January, which is usually a slow time for the real estate market, and the supply of homes on the market still rose from 9.4 months to 10.1 months. But this still qualified as good news because it was better than the doomsday scenario many are expecting.

Housing prices in many markets reached insane levels in 2005 and 2006, so a weak housing market could be with us through 2008 and into 2009. If the market stabilizes at all, investors are right to celebrate: It would be a huge step toward fixing so much of what’s gone wrong in the economy and the financial markets.

The price of housing could affect:
1. The fate of a whole raft of housing-related jobs and industries (including home improvement retailers like Lowe’s, which I wrote about today.)
2. The final damage to the world’s financial system from the subprime debacle: If home prices stabilize, homeowners and speculators might actually be able to pay off those subprime mortgages.
3. The fate of the credit markets, and debt investors’ appetite for risk. (Closely related to #2 above.)
4. The mood of consumers, affecting their willingness to spend.
5. Voters’ moods in this presidential election year.
6. The extent to which the Federal Reserve cuts interest rates to spur more housing demand, and to what extent those cuts are effective in spurring economic growth.
7. Finally, (because of #1 to #6, with the possible exception of #5) home prices will determine how much the U.S. economy slows this year, and how much that slowdown (or recession) spreads to the rest of the world.

Yes, the world’s economic fate rests on the shoulders of regular Americans buying and selling homes this year.

Reader Comments

Brian Patton, CCIM

August 2, 2008 8:32 PM

Don't you think that's a little overly dramatic. I think consumer confidence, hence affecting consumer spending, is the biggest denominator. True; housing has its affect on spending, but retail spending is important and the biggest reason we are in a lull in that area is the upcoming presidential election and the negative media coverage of the economy. Let's face it, if we didn't know the economy was so bad...wouldn't we still be spending...and then the economy wouldn't be so bad? Don't take my word for it though, check out this info. from two pretty good economists.

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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