Housing: The Recovery Wrecker
America’s biggest problem remains the industry’s persistent recession—and its impact on the credit markets
May 29 2008 - The latest spike in oil prices has dampened but not doused investors’ hopes that the worst of the economic and credit market woes are over. Recent reports show the economy, while still fragile, is holding up better than expected. Consumers haven’t cut back in a major way, and tax rebates are arriving. Businesses are spending and hiring less, but the retrenchment has been mild—in part a reflection of resilient profits outside the financial sector. Most important, the credit markets, while hardly back to normal, are functioning better now, and the full impact of the Federal Reserve’s rate cuts is yet to come.
But the economy still has a long way to go before investors will have any right to breathe easier. As sobering as $130 oil is, there’s a different message for investors in the latest news on housing: Oil is not your biggest problem. The housing slump and its broad effects still weigh heavily on economic growth and have the greatest potential to wreck a recovery.
The direct effects of the housing recession subtracted a percentage point from overall growth last quarter, and they are on track to do the same this quarter. More important, mortgage defaults, which are at the center of credit-market dysfunction and tighter credit conditions, are still soaring and unlikely to top out anytime soon. The delinquency rate on mortgages hit another high in the first quarter, rising to 3.68% from 3% in the fourth quarter. Plus, home prices are still in free fall, which creates more troubled mortgages and weighs on household wealth. It’s a corrosive mix that will not stop eating at the economy until housing activity begins to firm up.
Huge Inventory of Unsold Homes
On that front, there’s no progress. Sales of existing homes edged down in April, although they do show signs of stabilizing, holding close to 4.9 million annually since the end of 2007. Still, the number of existing homes currently for resale climbed 10.5% in April, and at the current rate, it would take a record 11.5 months to unload that inventory. Normal inventory levels typically represent less than five months’ worth of sales.
New-home buying, crucial to the construction industry, is a different story. Sales rose in April but are still down 12% from the end of last year. Amid weak demand, single-family home starts fell in April for the 12th month in a row, and the supply of unsold new homes, which dipped to 10.6 months’ worth, was still near March’s record high. Even if demand stabilizes soon, the mountain of unsold homes, both new and existing, will continue to put downward pressure on prices.
Home prices aren’t just falling—the drop is picking up speed. In the three months through March, home prices fell 7%, after declining 5.4% in the previous three months, based on the S&P/Case-Shiller index for 20 cities. That brings the total drop, since the 2006 peak, to 16.6%, and only adds to the pressures on consumers.
Housing: The Recovery Wrecker
by James Cooper | BusinessWeek