The economic impact of a slight increase in house prices
by Bill McBride on 8/07/2012
If I’m correct about house prices bottoming earlier this year – and the CoreLogic report released this morning is another indicator that prices might be increasing a little – a key question is: What will be the economic impact of slightly increasing house prices?
We saw the impact on Freddie Mac this morning. Freddie reported net income of $3 billion compared to a $2.4 billion loss in Q2 2011. Freddie noted that the decline in its loss provision was due to “improvements in the number of newly impaired loans and to lower estimated future losses due to the positive impact of an increase in national home prices.”
Also I expect CoreLogic and Zillow to report a meaningful decline in the number of homeowners with negative equity in Q2. We might see something like 1 million households that regained a positive equity position at the end of Q2 2012. These are borrowers who might find it easier to refinance, or sell if needed.
We will probably also see a meaningful decline in the number of newer mortgage delinquencies. Note: The MBA Q2 National Delinquency Survey results will be released this Thursday.
Another impact that we’ve discussed before is the impact on listed “For sale” inventory. Seller psychology is very different if prices are perceived to be falling, as opposed to if prices are stabilizing or even increasing. If potential sellers think prices will fall further, then they will rush to sell and list their homes right away. That behavior pushes up inventory. But if potential sellers think prices are stabilizing, and may increase, then they are more willing to wait until it is more convenient to sell. I think we’ve been seeing this change in psychology for some time.
And private mortgage lenders and homebuilders will regain confidence in the mortgage and housing market. Flat to rising prices give homebuilders a better idea of the pricing needed to compete in the market – while more consumer confidence in house prices is leading to more demand for new homes. Note: Residential investment is the best leading indicator for the economy, so this pickup in new home sales and housing starts suggests a pickup in the overall economy (barring exogenous events – like the European crisis – or policy mistakes).
In conclusion: There are many positive economic impacts from flat to rising house prices and we are just beginning to see the positive impact on the overall economy.
Read more at http://www.calculatedriskblog.com/2012/08/the-economic-impact-of-slight-increase.html
Buffett’s Views on Housing
by CalculatedRisk on 2/25/2012
In Feb 2010, Warren Buffett wrote:
[W]ithin a year or so residential housing problems should largely be behind us, the exceptions being only high-value houses and those in certain localities where overbuilding was particularly egregious.
Of course I disagreed with his timing.
Then in Feb 2011, Buffett wrote:
A housing recovery will probably begin within a year or so. In any event, it is certain to occur at some point.
As I noted last year, the key word was “begin” and sure enough – based on housing starts and new home sales– it appears a modest recovery has begun.
Today Buffett wrote:
Last year, I told you that “a housing recovery will probably begin within a year or so.” I was dead wrong.
Really? And I was going to give him a little credit this time. Oh well.
More from Buffett:
Housing will come back – you can be sure of that. Over time, the number of housing units necessarily matches the number of households (after allowing for a normal level of vacancies). For a period of years prior to 2008, however, America added more housing units than households. Inevitably, we ended up with far too many units and the bubble popped with a violence that shook the entire economy. That created still another problem for housing: Early in a recession, household formations slow, and in 2009 the decrease was dramatic.
That devastating supply/demand equation is now reversed: Every day we are creating more households than housing units. People may postpone hitching up during uncertain times, but eventually hormones take over. And while “doubling-up” may be the initial reaction of some during a recession, living with in-laws can quickly lose its allure.
At our current annual pace of 600,000 housing starts – considerably less than the number of new households being formed – buyers and renters are sopping up what’s left of the old oversupply. (This process will run its course at different rates around the country; the supply-demand situation varies widely by locale.) While this healing takes place, however, our housing-related companies sputter, employing only 43,315 people compared to 58,769 in 2006. This hugely important sector of the economy, which includes not only construction but everything that feeds off of it, remains in a depressionof its own. I believe this is the major reason a recovery in employment has so severely lagged the steady and substantial comeback we have seen in almost all other sectors of our economy.
Buffett makes several key points:
1) Housing completions have been at record lows.
2) There are currently more households being formed than new housing units completed, and this is decreasing the excess supply.
3) The excess supply will be “sopped up” at different rates across the country.
4) Housing is a key reason for the sluggish economy (not the only reason).