Photo: Flickr / ellie g.
BofA economist Ethan Harris is sceptical that there is a budding recovery in the U.S. housing market.In a note to clients today, he gives four reasons why he has his doubts that the recent upturn in prices in many markets – as evidenced by the latest Case-Shiller data – is a meaningful help to the slowing U.S. economy.
From the note:
First, at the peak of the boom in 2005 residential construction was more than 6% of GDP, but now it is just 2.3% of GDP. Hence even a huge 20% quarter only adds 0.5 pp to GDP growth.
Second, despite the strong first quarter, overall GDP grew just 1.9% on the quarter. So the recovery is already embedded in the data.
Third, while our economist Michelle Meyer has been expecting a near term bounce in the data, she continues to see a bumpy bottoming process. In particular, the housing sector is vulnerable to the uncertainty shock of the fiscal cliff. As she notes in this week’s Housing watch, an economically meaningful boom is still a long way off.
Finally, it will take a sustained period of price increases to reverse the negative wealth and confidence effects of the housing crash. The rise in prices over the last three months reverses about $0.2tr of the $6.7 tr in lost wealth since the housing peak at the end of 2006. Perhaps more to the point, households remain very sceptical about the home as an investment and store of wealth.
Weak housing unfortunately remains a major drag on the economy, and gains no longer have as much of an impact as they did when the housing market drove the economy in pre-crisis years.
Just to rub things in, Harris includes this chart to emphasise how small the housing market is relative to the oncoming fiscal cliff.
Photo: Bank of America Merrill Lynch
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