Housing and the Economic Recovery

Perhaps the housing market is the best economic indicator?

As an economist, I am frequently asked for my predictions on when the economy is going to turn around.  Have we reached the bottom?  Have we begun to recover?  Might we go into a second, perhaps more severe recession?

Those are tough questions to answer.  Business cycles are notoriously difficult to predict.  In fact, about the only thing we know for sure is that no two business cycles are alike. Each is unique in some significant way.

Changes in the housing market may be one of the most meaningful indicators of a recovery, because housing stability is such a fundamental indicator of how households are budgeting their income.  Notice that I did not say that the level of homeownership was a useful indicator; instead, I look to changes in the housing market, either away from or toward an apparently sustainable and affordable supply of homes, for evidence of where in the business cycle the economy may be.

Despite record low mortgage rates and first-time home buyer credits, the U.S. housing market remains anemic.  Rising foreclosures in several major metropolitan areas will keep housing prices low for some time to come.

The U.S. currently has about 1.7 million excess housing units available.  Typically, about 1.3 million new households are formed in the U.S. per year.  But with the unemployment rate topping 10%, new household formation will fall to about 1 million per year.  If new home construction remains at its current level of about 600,000 units per year, it will take over 4 years (1.7 million/400,000) for the excess supply of housing to be absorbed and housing prices to recover.

Recovery rates will be much slower in some markets, such as in Florida, Nevada, and California, but I believe that the rest of the U.S. along with most other developed economies are looking at a three- to four-year period of time before housing and thus the overall levels of output return to their pre-recession levels.

By Sherry Jarrell

5 thoughts on “Housing and the Economic Recovery

  1. Yes, and it’s perhaps even “worse”, as American people learn to live more on top of each , European (or anywhere else’s) style.

    One can also look at P/E ratios such as Price to Rent, or median price to median income… I do not think any of those look good…

    BTW, this is why a serious government stimulus program of advanced technology creation and deployment is needed… which brings us naturally to Copenhagen… And away from the Afghan adventure… So far a lot of the Obama stimulus has been an attempt to simulate european automatic stabilizers (or ridiculous programs such as the poorly thought out cash for clunkers… As you pointed out…How hard was it to copy was is done in France?)

    PA

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  2. Median US family income: 50 K. Median US house price: 212 K. So prices would need to fall by 25%. At least.

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    1. I think that’s not unreasonable to assume. Practically free money has built up another bubble that will burst – bubbles always burst. What the pin will be and when is more difficult to predict but 2010 is likely to see the next failure. That will lead to further strengthening of the dollar and government bonds while oil, gold, equities and property prices fall.
      A further 25% fall seems most likely.

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