Housing and confidence: mixed messages
from Peter Radford
I am busily preparing for the WEA conference on ethics next week, but yesterday’s mixed news is worth a brief comment.
Clearly the housing news in the United States is not great. The latest Case Shiller index report released this morning brings 2011 to a dismal close. Prices fell 1.1% in December, meaning that the year as a while lost about 4.0%. Prices are now down in the range they were in 2003, and the index has lost an enormous 33.8% since reaching its peak. Obviously real estate remains mired in a slump even though there are signs of life in starts and sales. The simple fact is that the mania that overtook housing created such an illusory boom – remember when all your friends were convinced that home prices never, ever, fall? – that we were bound to go through a prolonged period of countervailing disillusion. Reality is sometimes harsh and the real estate market is now approaching reality.
One third of US home owners have mortgages that engulf there home price. Negative equity is a bane that prevents families from moving to find better work. It eliminates a source of wealth for retirement. It means that the family home is no longer a source of strength, but is a weakness. The knock-on effects of the collapse are still reverberating through the economy in the form of enforced savings, labor immobility, reduced financial security, and the casting of a long shadow over household prospects.
Of course there are many people who are now able to take advantage of the situation. Homes are cheaper than they have been for years. They are affordable for those who have the resources and credit standing to exploit the situation. The problem for the economy is that the number of such people is far less than the number of those still suffering from the negative consequences of the mania. The damage wrought by our collective lunacy will linger for years. Our hope resides in its slowly diminishing impact.
We ought also to recognize the geographical differences at play within the Case Shiller numbers. The crisis was unique in recent history because the entire nation was affected. That’s why those bank risk models were so monumentally hopeless – they assumed that the traditional regional differences where some prices rise even while others fall would continue. Nonetheless some areas were less affected than others. Prices fell from the peak by only 10% in Dallas, while they are down 51% in Miami and 61% in Las Vegas. Boston fared well with only a 14% decline in total, but New York, where so many of my friends claim prices haven’t dropped much at all, saw them off by 24%.
The real, and as yet unresolved, issue in all this is that we went to great lengths to repair the damage the mania caused to the banks, but that we have largely ignored and failed to deal with the exact same damage to ordinary households. Getting the banking system back on its feet apparently was more important than getting families back up and running. Such is the relative power of the lobbying movement in Washington and the unrepresented nature of the regular voter. Members of Congress who drone on about the vital nature of saving the banks, simultaneously lecture households about the virtues of hardship and the evils of borrowing more than they can repay. Hypocrisy pervades politics during normal times. This is a very bad case of it.
On a brighter note, consumers are noticing the economy’s slight resurgence. Confidence, as measured by the Conference Board, jumped to 70.8 in February, from 61.1 in January. That’s a healthy leap in the right direction and comes despite the rising gasoline prices analysts are harping on about. We should all note, though, that confidence on this index is usually in the 90+ range if the economy is a truly good condition. So we are a long way from where we need to be. Still progress is always welcome. The important improvement seems to be coming in terms of short term expectations. People are much more comfortable with where they think the economy is headed near term. There has been a steady pick up in confidence in current conditions – what people think of what’s going on right now – but expectations had been much more gloomy. To the extent that those expectations are now also improving we can expect households to be more willing to spend on products that require a longer term commitment – things like cars and houses and so on. If this improving sentiment continues throughout then year it will provide the necessary support to lift the economy a little above the 2.0% to 2.25% growth range I have been using as my base forecast. Perhaps we can look forward to GDP growing closer to 2.75% – 3.0% later in the year.
But let’s not get too far ahead of ourselves. Housing is still a big drag on growth, and remains the sector to watch over the next few months