The Week Ahead

Vital Signs: High Hopes for a Housing Recovery


After a few rounds of uniformly upbeat housing data, some of it surprisingly strong, there is now little doubt that the long-awaited housing recovery is finally underway. Economists estimate that homebuilding will add more than 0.5 percentage point to third-quarter economic growth, the first positive contribution in 3½ years. The question now is: Will the recovery last?

Housing will be a key focus of this week's economic reports, and if the numbers are anything like those in recent months, the upturn appears to have legs. Sales of existing homes are up 13.6% since January, and the recent trend in pending sales, which tends to foreshadow actual purchases, is very strong in recent months, suggesting continued gains. New home demand is up 30% since January, and builder surveys show increasing optimism over market conditions. Starts of single-family homes have soared 35% since January, and because the level of starts is still running below sales, builders' inventories are falling sharply.

In fact, the overall inventory situation continues to improve notably, which is a key reason recent measures of home prices have shown more firmness. The supply of existing homes on the market in August stood at 8.5 months, at the current sales rate, and new home inventories were an even lower 7.3 months. Both levels were the lowest since early 2007. At the current rate of sales, new home inventories could be down to a 6 months supply by the end of the year, with existing homes at 7.5 months. Both readings continue to close in on the historical average of about 5 months.

Improvement in the inventory imbalance is the link to firmer prices, and, so far, the major price indexes have ended their three-year decline. The widely followed S&P/Case-Shiller gauge has posted three consecutive month-to-month gains through July. The same is true for the index from the Federal Housing Finance Agency, which includes only homes with conventional mortgages. However, with inventories and foreclosures exerting continued downward pressure on prices, the declines in these indexes may not be over just yet.

Much of the improvement in the housing market reflects better economic fundamentals, but much also derives from strong government support. Rates on 30-year conventional mortgage have fallen to 5% in mid October, down from 5.6% four months ago. However, the government's $8,000 tax credit for first–time buyers, which is due to expire on Nov. 30, has helped. So has the Federal Reserve's program to purchase mortgage-backed securities from Fannie Mae and Freddie Mac, thus opening up the market for mortgage securitization. If the tax credit expires on schedule, some home demand could be lost, although there are current legislative efforts to extend or even expand the program. In addition, the Treasury has said more than 500,000 mortgages have received modifications through the Home Affordable Modification Program (HAMP). That's some 40% of the currently eligible 1.2 million homeowners, but foreclosures continue to rise.

Economists generally believe that, while government support has been helpful, the surge in home affordability provided by low mortgage rates and prices has been the more important stimulus. Those conditions will not reverse any time soon, and they will help keep the housing recovery on track.

Here's the weekly calendar, from Action Economics:

  Top Economic Reports   Date Time For Median Estimate Last Period Producer Price Index Tuesday, Oct 20 8:30 a.m. Sept. -0.4% 1.7% Producer Price Index (Excluding Food & Energy) Tuesday, Oct 20 8:30 a.m. Sept. 0.1% 0.2% Housing Starts (Millions) Tuesday, Oct 20 8:30 a.m. Sept. 0.609 0.598 Leading Indicators Thursday, Oct 22 10:00 a.m. Sept. 0.4% 0.6% Existing Home Sales (Millions) Friday, Oct 23 10:00 a.m. Sept. 5.325 5.100 Source: Action Economics
  Other Reports and Events   Date Time For SPEECH: Fed Chairman Bernanke Monday, Oct 23 11:00 a.m. National Association of Home Builders Survey Monday, Oct 23 1:00 p.m. October ICSC-UBS Store Sales Tuesday, Oct 20 7:45 a.m. Oct 11-17 Johnson Redbook Weekly Store Sales Tuesday, Oct 20 8:55 a.m. Oct 11-17 SPEECH: Philadelphia Fed President Plosser Tuesday, Oct 20 8:00 p.m. Mortgage Applications Wednesday, Oct 21 7:00 a.m. Oct 11-17 SPEECH: Richmond Fed President Lacker Wednesday, Oct 21 12:00 p.m. Federal Reserve Beige Book Report Wednesday, Oct 21 2:00 p.m. SPEECH: Boston Fed President Rosengren Wednesday, Oct 21 4:30 p.m. Initial Unemployment Claims Thursday, Oct 22 8:30 a.m. Oct 11-17 FHFA Home Price Index Thursday, Oct 22 10:00 a.m. August SPEECH: Boston Fed President Rosengren Thursday, Oct 22 10:30 a.m. SPEECH: Chicago Fed President Evans Thursday, Oct 22 4:00 p.m. SPEECH: Fed Chairman Bernanke Friday, Oct 23 8:30 a.m. SPEECH: Fed Vice-Chairman Kohn Friday, Oct 23 11:30 a.m.
Cooper is BusinessWeek's senior editor and senior economist and writes the influential Business Outlook column.

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