Real Estate

A Housing Rebound Won't Lift the Economy


The housing market may start crawling up from rock bottom this year. Even if it does, though, any rebound is likely to be anemic. "There's a good chance of a housing turnaround this year, but it's not going to be enough to give much help to the economy," says Karl Case, the co-creator of the S&P/Case-Shiller indexes that track U.S. home prices. "We're coming off 50-year lows, and we still have to deal with the foreclosure mess."

On Jan. 8, the Massachusetts Supreme Judicial Court upheld a judge's decision that two foreclosures were invalid because the banks seeking to foreclose didn't prove they owned the mortgages. Joshua Rosner, an analyst at research firm Graham Fisher, called the decision "a landmark ruling" that "is likely to open the floodgates to more suits in Massachusetts and strengthens cases in other states."

Delaying foreclosures impedes the housing recovery, says Mark Zandi, chief economist at Moody's Analytics (MCO). That's because as long as there is the threat of more foreclosed homes coming onto the market, buyers will be hesitant as they anticipate prices falling further. "By the end of this year the housing crash could be over," he says. "Or, if we see foreclosures pushed into next year, we might not see a recovery till the end of 2012."

Housing was the workhorse of the U.S. economy before the end of the real estate boom. So-called fixed residential investment, a measure of homebuilding activity, contributed half a percentage point to gross domestic product growth in 2004, an 18-year high that outstripped defense spending's contribution, according to data from the Bureau of Economic Analysis. In 2005, housing accounted for 6.1 percent of economic activity in the U.S. Last year inflation-adjusted investment in new homes probably subtracted 0.17 percentage points from GDP, based on the average of 2010's first three quarters.

This year housing investment is expected to increase 9.6 percent, according to the median forecast of 30 economists at a symposium hosted by the Federal Reserve Bank of Chicago in December. That would still leave it at the second-lowest level in 15 years of BEA data, after 2010. The economists expect it to account for 2.6 percent of the economy.

New-home sales likely fell to 321,000 last year, the lowest going back to 1963, according to a forecast by Fannie Mae (FNMA), and sales of existing homes may have fallen to 4.82 million. Final numbers for 2010 come out later this month.

Sales of preowned homes and the construction of new houses will increase in every quarter of 2011, according to estimates by the Mortgage Bankers Assn., the National Association of Realtors, Fannie Mae, and Freddie Mac (FMCC). Home prices, which typically lag behind sales trends, will begin to recover by midyear, the forecasters say.

Resales are likely to reach 5.23 million at an annualized pace by the end of the year, up 10 percent from the current quarter, according to Fannie Mae. Home prices probably will start picking up in the third quarter, posting a 0.6 percent increase for the year, which would be the first advance since 2006, according to the mortgage company's forecast.

The market may improve more quickly if the economy continues to expand, says Case. GDP grew at a 2.6 percent rate in 2010's third quarter, up from 1.7 percent in the prior period, the BEA said in a Dec. 22 report. The unemployment rate fell to 9.4 percent in December, the lowest in 19 months, according to the Bureau of Labor Statistics. "If the economic recovery keeps going and unemployment keeps improving, it's a mood changer," said Case. "It's possible we could see people get off the fence and get back into the market."

The bottom line: While forecasters expect housing activity to increase, they don't think it will make a significant contribution to economic growth.

Howley is a reporter for Bloomberg News in Boston.

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