August 5 , 2009
Housing: Green Shoots or Weeds?
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We’re seeing green shoots in the economy according to many commentators, but are they weeds?
One thing that caught my eye recently is the housing picture. On July 28, the WSJ had a chart showing new single-family home sales for June. These sales were up 11 percent month-over-month, the largest such increase in nine years. There have also been reports of decelerating price declines and bullish sales numbers in some key markets. The WSJ also said that unsold home inventory was “just” 8.8 months worth at current sales rates.
On July 18, the New York Times reported similar news, and that housing starts unexpectedly rose in June more than economists had forecast. “The gains were concentrated in construction starts on single- family homes, which increased 14 percent or the biggest rise since December 2004,” according to the New York Times. And, “Housing permits in June, a measure of forward-looking builder confidence, posted an 8.7 percent increase, the largest gain in a year.”
I don’t know about you, but although this may be progress, I’m still worried. Eyeballing the WSJ chart, it looks like new home sales probably ran around 1.1 million a year from 2003-05. Then a steady decline began until bottoming out at about 300K+ early this year. No matter how you look at it, that’s a drop of more than two-thirds from the peak years of this decade. It’s more than 50 percent below the early 2000s when we had 9/11 and a recession as well.
Housing’s role in the greater economy is known to be very important. That said, I was surprised to learn from the National Association of Home Builders that Housing Services and Fixed Investment account for a whopping 14+ percent of GDP on average over the years. In 2005, it was 16.7 percent. This year’s first quarter was 13.6 percent. So even if we see some modest growth it represents a recovery from a massive decline, perhaps as much as $400B from the high. Even in a $14 trillion economy, $400 billion is nothing to sneeze at.
I count myself as an optimist (you may recall that the April QC Newsletter dealt with signals of an upturn), but we are still looking up from a deep hole. Do we need to start digging up weeds or get out the lawnmower? We’ll see shortly.
--Jeff Cosman