Watching the Economy by Clint Burdett CMC® FIMC

June 2009

The Housing Sector Will Not Lead Us Out of the Recession

By Clint Burdett CMC

Spending on our homes is a fundamental driver of the US economy. A "driver" is a trend in the community, that as it builds momentum, triggers economic growth and creates opportunities for your business and your family.

Foolishness in the home mortgage and banking industries that repackaged risky mortgages led us into this severe recession and the housing sector for will lag the recovery of the economy. That is why the recovery will be modest. The data indicates that the excess inventory of new and existing homes is being drawn down very slowly and prices are still declining.

Until we begin to sense our personal net worth is increasing, most of us will use our cash carefully. Our sense of security about our home's value, often our biggest "savings account" for retirement, impacts our discretionary spending. If our house value is declining, we prudently conserve cash.

Data for April shows that the US personal savings rate is increasing up from 4.5% of disposable income in March to 5.7% in April. The March S&P/Case-Shiller home Price's index for 20 major metropolitan areas showed prices still declining as the bargain-basement sales of foreclosed homes continues. The number of delinquent loans in the 30 to 90 day range continues to trend up as the effects of losing one's job in the late winter are seen in the foreclosure statistics. In early May, Federal Reserve Board Chairman Bernanke testified to Congress that the housing market is bottoming.

But, in late May, 30 year fixed mortgage rates moved up through 5% and are trending up. This is probably a result of heavy US government borrowing, the Fed holding back purchasing those Treasury debts, and increased demand for good deals on houses by qualified buyers. It will take time to shift back to a seller's market.

The good news is that new housing starts are trending down as builders hold back to clear inventory. In April the Census Bureau reported 352,000 new homes sold with 458,000 new starts. We see the corrective actions are in place but it is unlikely that the excess inventory will clear this summer. It will be a while until home prices begin to rise to rekindle our sense that our net worth is improving.

The statistic to watch to judge when the housing sector is driving economic improvement is the months of supply of "National Existing Home Sales" published monthly about the 25th of each month by the National Association of Realtors. The months of inventory of existing homes for sale peaked in July and August of 2008 and has not yet begun to trend down to about seven months of inventory which represents a healthy market.