Bloomberg News

Housing Packs Punch for U.S. Growth in 2013 and Beyond

February 04, 2013

Housing Packs Punch for U.S. Growth in 2013 and Beyond

Workers build a house at in Rancho Santa Fe, California. Photographer: Sam Hodgson/Bloomberg

The housing rebound is broadening to other parts of the U.S. economy and will likely lend impetus to growth through 2013 and beyond.

Climbing home prices are lifting household wealth and boosting the purchasing power of consumers. Declining mortgage delinquencies and foreclosures are buttressing bank balance sheets, giving them greater leeway to lend. And rising property- tax revenue is fortifying the finances of state and local governments, alleviating pressure on them to cut budgets.

“The housing recovery will kick into a higher gear as the year progresses,” said Mark Zandi, chief economist in West Chester, Pennsylvania, for Moody’s Analytics Inc. “We’re going to get a lot of juice from the channels” through which it affects other parts of the economy.

The spreading impact of housing will help the economy weather looming federal government spending cuts and tax increases and keep on growing. Rising residential construction and its knock-on economic effects will boost gross domestic product by about 0.75 percentage point this year, offsetting much of the drag from the fiscal squeeze, according to Zandi. He sees GDP growing at about 2 percent again this year.

Elsewhere, concern the European debt crisis may intensify caused stocks to fall in the U.S., driving the Standard & Poor’s 500 Index to its biggest decline of the year. The S&P 500 dropped 1.2 percent to 1,495.71 at the close in New York. The Stoxx Europe 600 Index slid 1.5 percent.

A report from the Commerce Department showed U.S. factory orders rose less than forecast in December, reflecting a drop in non-durable goods that partly countered gains in construction equipment and computers.

Factory Orders

Bookings climbed 1.8 percent after a revised 0.3 percent drop in November that was initially reported as unchanged, the agency said today. The Bloomberg survey median called for a 2.3 percent gain. Demand for durable goods increased 4.3 percent, little changed from a 4.6 percent gain estimated last week, while non-durables dropped 0.3 percent on declines in petroleum and tobacco.

Housing has helped lead the economy out of every recession since 1950 except for the last one in 2007 to 2009, according to data compiled by Bloomberg. Homebuilding climbed 12 percent in 2012, the first annual increase since 2005. As Americans move into new homes, they buy appliances and furniture, giving growth an added lift. Construction-equipment makers to paint- and building-materials businesses also benefit.

There are “pretty substantial” ancillary effects from housing, said James Bullard, president of the Federal Reserve Bank of St. Louis.

Fed’s Bullard

“It’s not just the guys that are putting the roof on the house,” he said in an interview in Washington on Feb. 1. “It’s the transportation associated with it, it’s the Realtor business, the lending business, all kinds of other businesses.

“The psychology has shifted,” he added. “Good things are happening.”

With housing finally starting to revive, the expansion may be ready to accelerate, said Michael Bordo, professor of economics at Rutgers University in New Brunswick, New Jersey.

Research by economists Karl Case, John Quigley and Robert Shiller found that changes in house prices -- and in real estate wealth -- have a much bigger impact on consumer spending than the ups and downs of stock prices and financial wealth.

$80 Billion

Based on that just-published paper, Case reckons that consumption will be boosted $80 billion this year by the rise in house prices that has already occurred and expectations among homeowners of more to come.

Housing “has turned from a headwind to a tailwind” for the economy, said Case, who developed a series of house prices indexes with Yale University professor Shiller.

The S&P/Case-Shiller index of property values in 20 U.S. cities increased 5.5 percent in the year through November, the biggest gain since August 2006, according to data released on Jan. 29.

Rising prices and mortgage rates near a record low in the U.S. are triggering a wave of refinancing, especially bringing relief particularly to distressed homeowners. Underwater borrowers --or those who owed more on their mortgages than their houses were worth -- fell by almost 4 million last year to 7 million, and could drop to 4 million within two years, according to JPMorgan Chase & Co.

Mortgage Payment

Aaron Miller, 32, an electrical engineer in Orlando, Florida, cut payments on a $160,000 mortgage to $1,050 a month from $1,600 after refinancing a three-bedroom property he retained when he moved in 2011 to a larger home for his family. Miller, who is renting out the house because he would have been forced to take a large loss on a sale, expects real-estate prices will recover in Florida over time. He refinanced under the government’s Home Affordable Refinancing Program.

“No one would have touched this loan without HARP” because the value of the loan exceeds the home’s value, he said, adding the savings from refinancing will go toward day-care expenses, including clothes and food, for his two children. “We will just pay the bills. Things had been pretty tight.”

Banks too also are benefiting as loan delinquencies and foreclosures decline, said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York.

Delinquencies -- homeowners who are 90 days or more behind on mortgage payments -- fell to 5.9 percent of outstanding loans in the third quarter from 6.3 percent in the previous three months, according to the Federal Reserve Bank of New York. The July-September figure was the smallest in almost four years.

Foreclosure Filings

Foreclosure filings dropped 10 percent in December to their lowest level since April 2007, according to RealtyTrac, the Irvine, California-based online marketplace for foreclosed properties.

Reduced credit losses will help banks build up their capital and pave the way for stepped-up lending, Feroli said. That will have more of an impact into next year as demand for credit picks up, adding as much 0.4 percentage point to GDP, according to the former Fed economist.

“We’re sitting on tremendous liquidity in our industry,” Bank of America Corp. Chief Executive Officer Brian T. Moynihan told Bloomberg Television on Jan. 25. The Charlotte, North Carolina-based bank ranks second by assets among U.S. lenders.

State and local governments also are seeing their finances improve as their property tax take rises. Revenue from that source totaled $474.7 billion in the 12 months through September 2012, up 1.6 percent from the comparable period a year earlier, according to the Census Bureau.

Credit Ratings

Los Angeles received its first credit-rating increase in more than 20 years from Moody’s Investors Service, which cited growth in property taxes in the nation’s second most-populous city. The action, lifting the city’s general-obligation rating to Aa2, the third-highest level, from Aa3, affects $3.3 billion in outstanding debt, Moody’s said in a Jan. 23 statement.

Investor confidence in municipal debt is the highest since 2011. It cost the annual equivalent of as little as $172,000 last week to protect $10 million of munis for 10 years through credit-default swaps, according to Markit Group Ltd. Data compiled by Bloomberg. That’s the cheapest since July 2011.

“Housing could be a major story this year,” said Carl Riccadonna, a senior U.S. economist at Deutsche Bank Securities Inc. in New York, who estimates a $1 increase in home prices lifts consumer spending by 5 cents to 10 cents. “The housing recovery is gaining momentum. The sector has worked off its excesses.”

Homebuilders from Lennar Corp. (LEN:US) to D.R. Horton Inc. and PulteGroup Inc. in January reported that sales and orders climbed last quarter. Lean inventories of both new and previously owned homes, alongside rising purchases, bode well for construction and prices.

Pricing Power

As “pent-up demand unwinds, homebuilders are gaining pricing power,” Stuart Miller, chief executive officer of the Miami-based Lennar, said on a Jan. 15 earnings conference call.

Michelle Meyer, a senior U.S. economist at Bank of America, in January raised forecasts for home prices through 2015. Property values will increase 4.7 percent this year, 7.7 percent in 2014, and 5.2 percent the following period, she estimates.

The various ripple effects from housing -- the industry that helped trigger the recession and is now the bright spot of the expansion -- will gather speed this year, Meyer said.

“It’s hard to fight the recovery in housing,” she said. “It has convinced a lot of non-believers, and is already adding to growth. 2012 was a good start to the housing rebound, which should persist and build momentum in 2013.”

To contact the reporter on this story: Rich Miller in Washington at rmiller28@bloomberg.net Shobhana Chandra in Washington at schandra1@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net


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