The Housing Recovery Debate Is Over — Here's What The Brand New Debate Is All Bout

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Photo: Vimeo/Uwe Lansing

The Case-Shiller Home Price Index came out today, and it showed that houses prices in July rose 1.20% from last year.That was above the 1.10% that was expected, and it was an acceleration from the 0.59% gain from the previous month’s rate.

But the real story is that people didn’t even seem to care that much.

Home prices rise? Yawn.

There are still some holdouts, but it’s just not that controversial anymore to point out that housing is coming back. That’s a major shift from a few months ago.

But there’s a new debate.

Does it matter? In other words: Can the housing rebound seriously boost the economy?

Here opinions are quite split.

Answering in the affirmative is Deutsche Bank’s Joe Lavorgna (who has a reputation for taking the bullish stance on debates):

Over time, rising home prices should embolden further construction and lending. Already, we have seen a dramatic improvement in homebuilders’ sentiment. The NAHB sentiment index increased three points last week to a 40 reading in September, a six-year high. Over the past 12 months, the NAHB index is up 26 points, the largest yearly gain on record. At its current level, the NAHB is consistent with a minimum of 1 million housing starts per annum, up from 750k presently. Additionally, real estate loans are trending higher as well.


According to the Fed, the improvement in home prices has resulted in a large increase in homeowners’ equity over the past couple quarters. In point of fact, homeowners’ equity has increased $863 billion from Q4 2011 to Q2 2012. This has lifted owners’ equity as a share of total real estate from 41.6% to 43.1%. While this is still very low—the peak was 61.2% in Q1 2001, we are up from a record low of 37.2% in Q1 2009. At the margin, rising equity values should help mitigate foreclosures and aid in household balance sheet repair. Moreover, as we discuss in the current US Economics Weekly, rising homeowners’ equity is a key input into household buying power, a qualitative metric we use to help determine consumers’ ability to spend. The change in household cash flow and change in consumer credit are the two other primary inputs that are used in capturing buying power. At the moment, our analysis of buying power suggests that consumption is likely to continue to grow at around a 2% pace. While hardly robust, it will be enough to assure further modest expansion in overall real GDP growth and help minimize recession risk, provided we do not experience a severe energy price spike.

Others are more sceptical.

David Rosenberg’s Gluskin Sheff argued that it’s just too small to move the needle:

As far as the economic news is concerned, the only bright spot is the improvement we have seen in the housing market, ratified by many recent homebuilder reports. But this is otherwise known as the “law of small numbers” — nothing is going to zero. Even housing starts and sales receive some level of demographic support regardless of the shape the economy is in. But housing is a mere 2% of the economy. Discretionary consumer spending is around 40% and business capital spending is roughly 10%, and as we saw out of the likes of Dell and Hewlett-Packard recently, if firms aren’t buying computers, then they probably are not investing, and if they are not investing, neither are they hiring — and if they are not hiring, then consumers will not be spending on much beyond essentials (perhaps one reason why healthcare stocks barely budged in a day where the overall market was down 0.8%) … all the more so with the worst drought shock since 1936 about to send food prices into an upward spiral (a spiral that may get accentuated by a typhoon set to hit Liaoning Province, a key growing area of Northern China).

There’s a lot more to this debate, but this is the crux of it.

One side argues that the wealth effect will prove to be a big shot in the arm.

The other side suggests that the real housing recovery just isn’t big enough to matter..

At the moment, we’d lean on the wealth effect side of things for two reasons.

One is that if housing-qua-housing is not that big of a chunk of the economy, then it shouldn’t have mattered in the downturn.

Furthermore, the economic collapse happened after the homebuilder collapse (which started in 2006) suggesting that it was the price decline, not the volume of home activity that really mattered.

It seems safe to surmise that US houses represent the largest privately held asset class in the world. A sustained comeback in that category will likely make a  difference.

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