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Housing Revisited: On the Road to Recovery or Slipping Back Into Recession? No One Seems To Agree

There Is Truth in Both Views
January 30, 2013
Housing prices are up, housing prices are down. Housing is in recovery, housing is on the verge of recession. Just what’s up with the housing market? Not even the experts agree.

Dr. Robert Shiller, professor of economics and finance at Yale and co-author of the Case-Shiller Home Price Indices, said he doesn’t even know what to make of it. Writing in an op-ed published this past Sunday in the New York Times, Shiller wrote:

"We’re beginning to hear noises that we’ve reached a major turning point in the housing market - and that, with interest rates so low, this is a rare opportunity to buy. But are such observations on target? It would be comforting if they were. Yet the unfortunate truth is that the tea leaves don’t clearly suggest any particular path for prices, either up or down."


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Two days later, Standard & Poor’s released the latest Case-Shiller indices - and did it offer any clarity? Not in the least.

Here is the U.S. News & World Report headline regarding the indices: “Case-Shiller: U.S. Home Prices Continue to Climb.” And here is how the StockMarketWire played up the story: “FLASH: S&P/Case-Shiller 20-city composite falls.”

Both headlines are correct, although the disparate views are creating some confusion in the marketplace.

In November 2012, 10 cities and both S&P composites posted negative monthly returns. But for the year, prices rose in 19 of the 20 cities and were up in both composites.

“Winter is usually a weak period for housing which explains why we now see about half the cities with falling month-to-month prices compared to 20 out of 20 seeing rising prices last summer,” explained David M. Blitzer, chairman of the Index Committee at S&P Dow Jones Indices. “The better annual price changes also point to seasonal weakness rather than a reversal in the housing market.”

Others, including Luis Mejia, director of multifamily research for CoStar’s PPR division, believe that single-family home price volatility is being driven in part by investor activity. In a PPR Client Update titled If it Acts Like an Investor and Pays Like an Investor - It’s Likely an Investor, Mejia points that while mortgage-financed transactions represent the largest share of sales, “the proportion of all-cash transactions has clearly increased-from 4% in 2010 to over 6% in the third quarter.”

Mejia said he believes that the higher number of cash transactions is indicative of higher investor involvement and points out that, while in the short term investor involvement helps push prices up in some markets, “in the long term, this investment could slow down potential home price increases” because eventually “those investors could decide to list their properties for sale to take some profits or rebalance their portfolios.”

While we can't provide certainty as to where the housing market is headed, we can share the pros and cons of what other experts are saying.

In this corner, weighing in on the side that housing market is heading for trouble, are Deloitte Research. While in the other corner, weighing in on the side of the housing market is in recovery, are Goldman Sachs, Fitch Ratings and Fannie Mae.

We’re in Recessionary Territory


Dr. Carl Steidtmann, chief economist at Deloitte Research, writing in Deloitte’s Global Economic Outlook, argued earlier this month that the U.S. was heading into recessionary territory in early 2013. He suggested that a confluence of factors including the impact of Hurricane Sandy, the fiscal cliff, the weakness in global trade, and the givebacks from one-time developments that boosted third quarter growth, add up to a negative forecast for fourth quarter 2012 GDP.

Steidtmann’s prediction came true this week. The U.S. economy contracted at a 0.1% annual rate in the fourth quarter of 2012, the first decline in gross domestic product since the second quarter of 2009, the U.S. Commerce Dept. reported. The drop caught other analysts by surpirse. Most were expecting the economy to grow 1% last quarter, according to a consensus estimate from Briefing.com. The government says the data in the first reading are incomplete, with a more-complete revised reading scheduled for Feb. 28.

However, in contrary fashion, it’s worth noting that both nonresidential and residential real estate contributed positively to the GDP in the fourth quarter at 0.83% and 0.86% respectively.

Regarding housing specifically, Steidtmann writes: “There were significant downward revisions in the new home sales data published in October. The numbers show a flattening out of new home sales that began in February, with sales turning downward in May. With a pickup in building activity, there is a risk that inventories of new homes are greater than the demand, potentially resulting in a pullback in building [this year]. New home completions include homes built for rental purposes and owner-built units that are not included in new home sales, and as such, will always be greater than new home sales. The weakness in home sales will undermine home construction going forward. What has been a modest positive for the economy will go back to being neutral or slightly negative.”

Upturn Likely To Continue


Meanwhile, in its 2013 outlook, Goldman Sachs analysts noted the corresponding impact of rising home values and general consumer confidence: “Indeed, 2012’s 5% gain in national home prices boosted consumers’ net worth by an estimated $1 trillion, pushing consumer confidence to a 4-year high. In turn, rising net worth typically decreases consumers’ desire for precautionary savings, providing a tailwind to spending. Moreover, with the bulk of bank loans backed by real estate, rising home prices decrease banks’ credit losses and bolster their willingness to lend… Housing has transitioned from being an economic headwind from 2006-2011 to being a tailwind.”

In Early Stages of Housing Recovery


Chiming in with its Chalk Line report, Fitch analysts said: “Fitch‘s housing forecasts for 2012 were raised a number of times during the course of the year, but still reflected a below-trend line cyclical rise off a very low bottom. In a slowly growing economy with somewhat diminished distressed home sales competition, less competitive rental cost alternatives, and new home inventories at historically low levels, 2013 single-family housing starts should improve about 18%, while new home sales increase approximately 22% and existing home sales grow 7%. However, as Fitch Ratings has noted in the past, recovery will likely occur in fits and starts… Average single-family new home prices (as measured by the Census Bureau) improved an estimated 3.5% in 2012 and should rise about 3.8% in 2013.”

Housing Sector Poised to Contribute More to Overall Growth


Finally, although certainly not the final word on the issue, Fannie Mae Chief Economist Doug Duncan said this past week, “As fiscal policy debates subside later in the spring, we expect to see some upward trend in economic activity, with growth accelerating moderately in the second half of the year. That momentum will find support in the form of continued, albeit slow, improvement in the housing sector.”


Keep up weekly on national news, trends and property leads with the Watch List Newsletter, a weekly pdf that includes other news and leads not found on the CoStar Group web news pages. Sign up for the Watch List E-Mail Alert. A new issue is published late each Wednesday.


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