Real News
Real estate that is.
While we are all being distracted by totally unnecessary and febrile discussions of fiscal cliffs there is actual useful information emerging about the real economy. Not much mind you. This is a slow week what with Thanksgiving on the horizon. Still news is … well, news.
The last two days have seen the monthly release of data relating to real estate. It is almost all good.
New home construction is picking up quickly. Starts of new homes rose 3.6% in October to reach an annual pace of 894,000. That’s a whopping 42% increase over last year, although it lags lamentably behind the peak of 2.3 million a year reached in 2006.
There had been a widespread expectation that starts would decline in the wake of hurricane Sandy, and, indeed, starts in the Northeast dropped 6.5% from September. But a huge 17.2% increase out West and an 8.9% rise in the Midwest more than offset the storm’s effect.
The only downbeat aspect of today’s news was that permits for new construction fell away in October – down 2.7% from September – although all of the decline came in the more volatile multi-family sector, while permits for single family homes rose 2.2%.
On Monday we heard that sales of existing homes rose 2.1% in October, reaching an annualized rate of 4.79 million. Once again this is a long way short of the bubble induced peak rate of over 7 million a year we saw in 2005, but it is way up on the 2010 low of 3.3 million. The median home price also ticked up to $178,600, a rise of 11.1% over the past twelve months, and with existing home sales now up 10.9% on the year we can be unequivocal about saying a solid, if unspectacular, recovery is clearly underway in housing.
One last thing: inventories of unsold homes are also well down from their crisis levels. There are approximately 2.14 million homes in the unsold inventory, which represents about 5.4 months of sales at the current pace. This is the lowest inventories have been since 2006, and is another indicator of a tightening and more healthy market.
What does it mean?
Investment in real estate is a much smaller part of GDP than it was during the bubble years. Recall that a very large part of all GDP growth in the Bush era was due to over-construction and the bubble. We are no seeing a lower, and potentially more sustainable, level of activity that contributes less to employment and the economy generally. Still, the evident pick-up in the industry suggests that it will add somewhere between a quarter and a half a point to GDP in the fourth quarter. Given how slow growth has been lately that’s not a bad contribution and will help allay fears of a further slowdown.
Inside all this better news, we should not forget that twenty percent of homes are still encumbered by a mortgages larger than potential market prices. This mass of underwater mortgages will act as a lag on activity for quite some time. It is unlikely that prices will return to the levels necessary to clear the problem up, so there are large losses ahead for households stuck in such unfortunate circumstances. It is an abiding and sharp criticism of the attitudes in Washington that more has not been done to help households stuck with mortgages higher than current home prices. The impact on a household’s balance sheet in such a situation is identical to that we saw in the banking industry. Only Wall Street was able to parlay it’s loss of equity into a massive flood of government aid. Main Street has been left to work its way out the old fashioned way – hard work.
Somewhere along the way, welfare for bankers became more acceptable to our policy makers than welfare for homeowners. No wonder the plutocrats lost the election.
