Housing Slips Again

The news this week has been ho-hum. Nothing enough to alter our projection for the economy. Besides the events in Japan are a more compelling and important story than the relatively minor trickle of data here.

The exception being housing.

You may recall that housings starts jumped quite a bit in January up to an annualized rate of 618,000, which was an increase of 18.4%. Unfortunately this was highly skewed by an extraordinary increase in apartment construction which leaped a whopping 87.4%. This distortion was expected to produce a decline in housing starts for February, but no one thought the drop would amount to the 22.5% decline reported today.

Obviously housing is a long way from being fixed. Starts are now down to an annual rate of 479,000 which is only 2,000 higher than the all-time low set in April 2009. So after almost two years, and a whole lot of effort, the economic recovery has done nothing to re-ignite the housing market. It is worth recalling the role real estate played in the earlier part of the 2000’s: it provided, via construction, a disproportionate number of our job growth. Put another way: without construction the employment record of the Bush era would have been even more abysmal than it was. With the construction industry obviously flailing the economy will have an even harder time generating jobs. And today’s evidence totally undermines the notion that real estate will play much, if any, of a part in helping the recovery gain steam.

The problem is, of course, that the overhang of unsold housing, ongoing confusion caused by foreclosures, and now a return to declining prices has so shaken the industry that there is no incentive at all for builders to start new homes. This I expect to linger for a while yet. I see no sustained recovery in housing this year and only a slight chance in 2012.

Everything seems to be waiting for households to feel secure to commit to the longer term. That requires a better employment situation and decent wage increases. Neither appear imminent. Especially as austerity driven job losses gather steam later this year.

It’s all about demand. Then again, it has been since the onset of crisis.