Analyst: Don’t overreact on economy

Veteran Southern California real estate analyst G.U. Krueger adds his commentary on the housing market to this blog in a spot we call “Thursday Morning Quarterback.” Here’s his latest installment. …
Is there hope for a quick recovery without housing? If the emphasis is on quick, no. If the emphasis is on recovery, any recovery, yes. To expect anything but a slow and bumpy road to economic recovery is unrealistic, but to conclude from the recent turmoil in financial markets that the economy is headed for disaster is also problematic.

The US economy is still recovering. Its admittedly meager growth in 2011 Q2 continued to be driven by export growth and investment in equipment and software spending. Real exports, for example, grew 6% in 2011 Q2 from the quarter before, while overall investment spending increased 7.1%.

Although housing is still sick and enfeebled, the GDP component of real residential investment contributed a very small percentage (0.08%) to economic growth in 2011 Q2 and has done so 3 times out of the last 5 quarters. So, the drag from residential investment appears to winding down. The driver towards stimulus is apartment construction. In July 2011, US multi-family completions rose 42.3% over the year before, for example, undoubtedly a response to the positive market forces in this sector.

Admittedly, these are only small improvements, but that’s the point. The U.S. recovery is not for those demanding instant coffee. Housing, in this context will only gradually, very gradually recover. It is now totally dependent on economic and job growth. But to move from frustration about the slow pace of job growth to gloom and doom is an overreaction.
With respect to housing, we all wonder how many distressed properties remain in the pipeline, how many mortgages will be reset or recast, or how many more unemployed will add to the pot of troubled homes. Truth is, nobody really knows. Here is what we do know:

Remember the Credit Suisse Tsunami of resets and recasts supposed to hit the housing market about right now. Hasn’t happened, yet, probably because of super low mortgage rates, pre-emptive foreclosure, or strategic “walk-aways” that already occurred. Maybe it will just be more spread out, thereby curbing the intensity of a future housing recovery in two years or so. Slooow the housing recovery will be, to paraphrase Yoda.
Furthermore, by all accounts, the foreclosure statistics, at least in California, are coming down on all fronts, including the numbers on mortgages that are delinquent. Even the latest shadow number from CoreLogic are showing that first of all shadow supply is 1.7 million, not 5 million or 10 million. Second, it has been coming down now by one fifth since it peaked in January 2010. Is this good news? Kind of. Is it fantastically good news? No, the levels are still high and in the case of foreclosure way above peaks of earlier foreclosure waves. Again, there is a healing process, but convalescence will be slow.
Finally, one should not forget the tremendous investor activity in many housing markets. They are the true heroes in many regional markets, because they are the agents of the price mechanism. These investors are benefiting from sky-high housing affordability, which makes it possible for them to buy to rent and hold. They obviously clear the foreclosure markets and have helped to run down the unsold housing inventory in many market including such places as Phoenix Arizona and the Inland Empire, if the Realtor numbers are to be believed.

To sum it all up, the economic recovery is frustratingly slow and will be for a while. Housing, meanwhile, will heal and what’s helping it to do it is actually something that the gloomsters and doomsters forget: It’s the market mechanism, middle-aged grasshoppers! Be patient.


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