MacroScope

Just as Americans begin to regain some hope that the housing sector might be on the mend, we get another batch of data showing the sector’s not quite there yet.

Groundbreaking on homes fell unexpectedly in March to an annual rate of just 654,000, down from 694,000 in February and well short of the 705,000 Reuters consensus forecast. Some context: permits peaked above 2.2 million in early 2006, at the apex of the housing bubble. On the bright side, permits for future construction rose to their highest level in 3-1/2 years.



In other housing data this week, homebuilder sentiment deteriorated again after posting a pretty decent rebound from the very depressed levels seen in 2011.

More than six years after its spectacular collapse, the U.S. housing market – the laggard of the struggling economic recovery – may be poised for pickup, driven in part by an upswing in remodeling, Bank of America-Merrill Lynch economist Michelle Meyer thinks.

Gains are likely to be modest at first, and are subject to volatility since overall economic growth may well slow in the second half of this year. Also, given the deep hole housing has fallen into, the market is still far from a robust recovery, Meyer wrote in a note to clients drawn from recent research.

Still, some evidence points to the beginnings of an upswing. For one, data already indicate a rebound in spending on renovations. Remodeling will pick up steam as investors convert foreclosed properties into rentals, and homeowners who have held off doing repairs or additions decide the time is ripe, Meyer said.

Economic forecasters divide into two groups: those who cannot know the future but think they can, and those who recognize their inability to know the future. Shifts in the economy are rarely forecast and often not fully recognized until they have been under way for some time. So judgments about the U.S. economy have to be tentative. What can be said is that for the first time in five years a resumption of growth significantly above the economy's potential now appears as a substantial possibility. Put differently, after years when the risks to the consensus modest-growth forecast were to the downside, they are now very much two-sided.

As winter turned to spring in 2010 and 2011, many observers thought they detected evidence that the economy had decisively turned, only to be disappointed a few months later. A variety of considerations suggest that this time may be different. Employment growth has been running well ahead of population growth. The stock market level is higher and its expected volatility lower than at any time since the crisis began in 2007, suggesting that the uncertainty hanging over business has declined. Consumers who have been deferring purchases of cars and other durable goods have created pent-up demand. The housing market seems to be stabilizing. For years now, the rate of family formation has been way below normal as young people moved in with their parents. At some point they will set out on their own, creating a virtuous circle of a stronger housing market, more family formation and demand, and further improvement in housing conditions. Innovation around mobile information technology, social networking and newly discovered oil and natural gas is likely, assuming appropriate regulatory policies, to drive significant investment and job creation.

True, the risks of high oil prices, further problems in Europe, and financial fallout from anxiety about future deficits remain salient. However, unlike in 2010 and 2011, it is probable that these risks are already priced into markets and factored into outlooks for consumer and business spending. There has already been a significant escalation in oil prices. The European situation is hardly resolved but is unlikely to deteriorate as much in the next months as it did last year. And market participants report great alarm about the deficit situation. So it would not take great news in any of these areas for them to actually contribute to upward revisions in current forecasts.

The Fed calls it an “apparent misunderstanding.” Whatever term you prefer, a new Cleveland Fed study makes one thing clear: lenders are still overstating home values. The study focuses on real-estate-owned or REO inventory, which covers properties that are now owned by lenders.

We analyzed sales data from Cuyahoga County, Ohio, and found signs that appraisers, lenders, and investors could be routinely overestimating the property values of foreclosed homes there. We suggest some simple identifiers that can help lenders better estimate home values in weak housing markets. And though we have focused on one county, we believe the situation could be the same in other places. The factors we identify as possible causes of overestimation in Cuyahoga County are likely to be found in many other weak housing markets around the country.

The two Fed economists who wrote the report identify an array of reasons for such overvaluations, ranging from the perfectly innocent to the potentially dodgy:

There was something for everyone in the January existing home sales report. Bulls could point to the level of sales, which reached a 1-1/2 year high, and the decline in housing supply, long an impediment to the sector’s recovery. Bears might focus on the sharp downward revisions to prior months that suggested conditions were improving but from considerably more depressed levels.

But one nugget in the report was unequivocally bad: the proportion of distressed sales surged to 35 percent from 32 percent, a considerable one-month rise. For Michael Meyer, economist at Bank of America-Merrill Lynch, this means existing home sales numbers have become less reliable:

We think that simply looking at existing home sales is an insufficient way to gauge underlying housing demand since the data are heavily affected by investors and distressed sales. The best measure for demand from primary homebuyers is to look at mortgage purchase applications, which have remained sluggish. In addition, we think it is prudent to wait for the spring selling season before making conclusions about underlying housing demand. The winter is typically the slow season for home sales, making the data less reliable. We expect the spring selling season to show some improvement, but we believe it risks disappointing relative to market expectations.

Federal Reserve Chairman Ben Bernanke has made clear the central bank is considering another round of monetary stimulus. Fed officials have also suggested that if they were to embark on a third round of quantitative easing via bond purchases, or QE3, they could favor mortgage-backed securities in an effort to boost housing.

Not to read too much into anecdotal evidence, but it’s hard not to see some symbolism in Bernanke’s next public appearance, announced late on Thursday. On February 10, Bernanke will be in Orange County, California, one of the epicenters of the U.S. housing crisis. His chosen forum? The National Association of Homebuilders International Builders’ Show. The topic: Housing Markets in Transition.

Protests against Wall Street and the U.S. financial system are hanging over an annual gathering of economists and social scientists in Chicago. Yale economist Robert Shiller offered two cheers for capitalist finance, saying that while the U.S. free market system has contributed to higher living standards, the vehemence of the recent public outcry points to a need for greater democratization. This is how he put it in a speech:

Occupy Wall Street … was something that in some sense you could see coming. I think we have increasing concerns about inequality, which is getting worse, about the distribution of power.

But rather than throw the financial system out, Shiller called for tinkering. Financial institutions and structures such as insurance or mortgage securitization have a role in improving social and human welfare, Shiller argued. U.S. economic success is due to a financial system that has evolved over centuries and helped improve the quality of life, he added.  A shortcoming of the Occupy Wall Street movement is that it doesn’t accept those contributions, he said.

As 2011 draws to an unspectacular close, U.S. economic data are sending thoroughly mixed messages about the near-term path of the recovery. That’s not particularly reassuring given the still enormous risks emanating from Europe – but it’s better than the unequivocal weakness that prevailed during the first half of the year.

Consumer confidence offered some reassurance, jumping to an eight-month high in December and showing other encouraging signs as well as Eric Green of TD Securities explains:

The better than expected consumer confidence numbers (64.5) put confidence, like most measures of economic activity, back to the levels of early spring. Views on the labor market, however, look to be rising at a much better clip. The labor differential (between jobs plentiful and hard to get) continued to improve. That measure tracks the unemployment rate very well. It rose in December from -37.4  to -35.1. That remains exceptionally weak, but it is the trend that matters. That trend has improved decisively over the past several months and is now well above the spring levels that averaged closer to -39, and is the highest since the end of 2008.

Surprise! There’s some life in housing after all. U.S. construction starts and building permits jumped to a 1-1/2 year high in November as demand for rental apartments rose, suggesting a downtrodden housing market may be entering a tentative recovery. But will this be another in a long string of bottom-bounces? Or is it the start of a trend? 

Starts surged 9.3 percent to a seasonally adjusted annual rate of 685,000 units last month, the highest level since April last year and well above the Reuters consensus forecast of 635,000. Stephen Stanley at Pierpoint Securities was reticently enthusiastic:

Could it be? Is the housing sector finally beginning to stir? It is a little premature to declare victory, but the data are starting to point to some stirrings in residential construction activity. To be sure, we should not be entirely surprised. New home inventories are far and away lower than they have been in decades.

The U.S. home price drop is adding a further drag on local budgets by shrinking the property tax base, according to a new study from the Federal Reserve Bank of Cleveland.

That sets the current episode apart from other recessions, where rapid housing rebounds alleviated some of the budget pressures naturally associated with periods of contraction. The report’s authors, economists Thomas Fitzpatrick and Mary Zenker, explain:

During and after earlier recessions, home prices remained flat or increased. Stable home prices provide stable tax revenue, which is used to fund many critical city services, such as the local police force, fire department, public education, and infrastructure projects. The fall in property values that began in the recent recession — and that continues in many markets today — may be amplifying the budget crises across the country because of the decline in property taxes it is causing.