After markets delivered last rites, the U.S. economic recovery received a boost last month, which felt like a new lease on life. The economic data at this point still aren’t telling us whether the patient is dead or just dragging. But it did provide more support to our forecast that the recovery will limp along at half speed, rather than sink into recession.
Housing continues to hobble along, with home sales barely above 2009 lows, despite near-record low mortgage rates. Housing starts and sales are slowly increasing after last year’s tax credit hangover, but we don’t expect the pace to pick up anytime soon. In fact, we expect the overhang of unsold homes to get bigger as foreclosure delays ease, and we think prices are likely to weaken further through the year.
Housing continues to threaten the recovery because still-tight lending conditions and a sluggish recovery prevent sales growth. August sales were mixed. Existing home sales jumped almost 8% over July and about 20% above its trough. But, new home sales, at a 295,000 annualized rate, are only 6.1% above an all-time low of 278,000 last year. While starts and sales have stabilized after plummeting earlier this year, starts are only slightly above the all-time low of April 2009. The spring rebound indicates that the decline stemmed from weather and the changes in regulations (including tax rebates) in several states that took effect in January and caused a spike late last year. Hurricane Irene distorted August activity, and the 3.2% jump in August permits, a leading indicator for future building activity, suggest some recovery this fall.
But even allowing for the weather, housing is weaker than we expected. We expect 600,000 total starts in 2011, which is dismal compared with 1.6 million needed to keep up with demographics and the 2005 peak of 2.1 million. This likely will be the fourth consecutive year that starts have been less than one million, the first time since World War II.
In August, the supply of unsold inventory for existing homes fell to about 8.5 months from 9.5 months in July, and was 6.6 months for new homes. Both are much better than the double-digit reading a few months ago, though are still above the six-month historical average. This excludes homes in the process of, or likely to be in, foreclosure, which at least doubles that supply. Standard & Poor’s Structured Finance Research Group estimates that it could take a few more years to clear the supply of distressed homes on the national market.
Unlike the modest gains expected for sales and starts, home prices will likely fall further. The current average home price is below its historical average relative to income, and interest rates are near record lows. However, high unemployment, tightening credit standards, and a lack of savings mean that fewer households can qualify to buy a home. At the same time, the glut of houses in the process of, or likely to be in, foreclosure is depressing prices even further. Prices are expected to drop another 5% over the next few months, rivaling the March trough in the S&P Case-Shiller index.
To read my entire U.S. Economic Forecast, click here.