On Tuesday, the National Association of Realtors reported that pending home sales—an indicator of future sales activity—fell 16 percent in November, which was much worse than expected. That pitched the stock market lower and led analysts to express concerns that a new housing bust would snuff out the recovery. After all, housing—a massive asset class, a huge provider of employment and cash for spending—led us into the ditch in 2008. Without a housing recovery, sustainable growth seems difficult to imagine.
But there are two reasons the home-sales report shouldn't have been a big deal. First, housing is a highly seasonal business, so the most relevant statistic isn't the month-to-month trend (comparing November 2009 with October 2009) but the year-to-year trend (comparing November 2009 with November 2008). And in November 2009, pending home sales were 15.5 percent higher than they were in November 2008.
Here's the second reason: People! Wake up! It may be difficult to imagine, but we're going to have to have this recovery and expansion without housing. In fact, we already are.
The economists congregating in Atlanta at the American Economics Association annual meeting are glum. Perhaps it's because their record at forecasting the economy has been so woeful in recent years. Or perhaps they can't conceive that the economy could stabilize and recover while housing—and the portion of the financial sector tethered to it—continues to suffer. After all, the last expansion was fueled by housing and housing-related credit. Those sectors accounted for a huge chunk of employment growth, and mortgage equity withdrawal (MEW) helped fuel consumer spending. (Working from the methodology on MEW laid out by Alan Greenspan and James Kennedy in this paper, the blog Calculated Risk found that Americans withdrew $682 billion in mortgage equity in 2006 and $473 billion in 2007.)
But since housing peaked in 2006, the housing sector has shed jobs. And as housing prices have fallen, mortgage equity withdrawal vanished. In fact, MEW turned negative in the second quarter of 2008. Instead of contributing to the capacity of Americans to spend, housing began subtracting from their ability to do so. And massive government support—tax credits for new purchases, the government backstopping Fannie Mae and Freddie Mac, the Federal Reserve buying hundreds of billions of dollars of mortgage-backed securities—has merely cushioned the fall. As the Case-Shiller housing index shows, home prices have firmed up since early 2009, but they're still falling on a year-over-year basis. In October 2009, the broadest index, showing prices in 20 metropolitan areas, was 7.3 percent below its level of October 2008. According to the National Association of Realtors, in October, prices of existing homes sold were down 7.1 percent from October 2008, with distressed properties accounting for 30 percent of sales. (Here's NAR's table of housing activity for the past year.) And there's reason to think 2010 isn't going to be much better. Mortgage rates are likely to head higher as the Federal Reserve seeks to pull some of its support from the economy. So those hoping that soaring Toll Bros. stock will replenish their 401(k)s are going to be waiting a long time. Housing, and most of the industries associated with it, have sucked wind for the last few years and will likely continue to do so for the next few years—even if the economy comes roaring back. That's what happens when bubbles collapse. The stocks of Cisco, Dell, Intel, and Microsoft haven't come close to regaining their bubble-era peaks. The thing that gets you into a bubble never gets you out.
That's the bad news. The good news? We've shown that we don't need housing to produce growth. The U.S. economy has staged an extremely dramatic turnaround, from contracting at an annual rate of 6.4 percent to growing at a 2.2 percent rate in the third quarter. Macroeconomic Advisers says fourth-quarter growth is tracking at a 4.9 percent annual rate. If that proves true, the economy's growth rate will have risen 11.3 percent in a nine-month period—an astonishing shift. And all this growth has occurred as house prices continued to fall and consumer lending declined. With apologies to Larry Kudlow, it's the greatest story never told!
What's driving this recovery? Ultra-low interest rates and government spending, yes. But also education and health care. And in recent months, sectors tethered to the global economy have come back: commodities, energy, and exports. Since April, exports have risen six straight months. Manufacturing is growing again, and business services are adding jobs. Instead of one big thing, it's a bunch of smaller things.
The continuing problems in housing have changed the way Americans consume, borrow, and invest. And that's all to the good. Instead of purchasing things with money borrowed via home equity loans, we're buying things with cash from earnings or savings. That may mean spending somewhat less, but spending somewhat smarter. Capital investment, instead of going into new housing and condo developments, is going into solar plants and retrofitting existing buildings. Growing without housing, and the cheap money it spun, may be harder. But it's not impossible.