Is the Housing Sector a Drag on the US Economy?

rcwhalen's picture

The S&P/Case-Shiller 20 City Index rose at a 13.8% annual rate in November.  This proves that the US housing market continues to recover, right?  The headlines in most news stories and economic commentaries indicate that the housing market is continuing to improve and with it the US economy.  But if you dig into the numbers a bit, the reality in the housing market is a good bit more subtle than the headlines suggest. 

Indeed, it can be argued that the US housing sector has not really recovered significantly and remains a major drag on US economic growth. Back in November 2012, I predicted that housing would be a drag on the US economy and could even drag us back into recession.  The reason?  The failure by Congress and federal regulators to restructure under water borrowers would eventually become a dead weight, limiting growth and job creation, as well as home price appreciation, as it did from the 1920s through until the early 1970s.

For example, in the second paragraph of the S&P press release it states:

For the month of November, the two Composites declined 0.1%. After nine consecutive months of gains, this marks the first decrease since November 2012. Nine out of 20 cities recorded positive monthly returns; of these nine, Boston and Cleveland were the only cities not in the Sun Belt. Minneapolis and San Diego remained relatively flat. After declining last month, Dallas edged up to set a new index high. Denver is 0.6% off of its highest level due to two consecutive months of declines.  

There are a couple of key things to remember when you are looking at the Case-Shiller Indices.  First and foremost, the price gains seen a year ago reflected the sale of foreclosed homes, what we call “REO” in the housing business for “real estate owned.”  If you take REO sales out of the numbers, then the real increase in home price appreciation or “HPA” was something more like 6-7%.  Second, the hottest housing markets are pulling the average higher while most other markets are slowing or even going down.

“November was a good month for home prices,” says David M. Blitzer, Chairman of the Index Committee at S&P Dow Jones Indices. “Despite the slight decline, the 10-City and 20-City Composites showed their best November performance since 2005. Prices typically weaken as we move closer to the winter. Las Vegas, Los Angeles and Phoenix stand out as they have posted 20 or more consecutive monthly gains.”

This week, Jeff Macke wrote an excellent analysis for Yahoo Finance showing the sharp divergence between different US housing markets.  Specifically, while about 20% of all US homes remain under water, the numbers for some states are much higher.  He noted:

December’s headline data from RealtyTrac showed the national rate slipping to 18% of homes being underwater or having negative equity (which simply means a homeowner owes more than the property is believed to be worth), but at the bottom of the scale, there are still 9.3 million “deeply underwater” homes that are in the hole by twenty five percent or more. In fact, six states that are at least ten points above the national average of 18%, including Nevada (38%), Florida (34%), Illinois (32%), Michigan (31%), Missouri (28%), and Ohio (28%).

“Normal real estate overhangs are created by people moving and dying,” notes a veteran real estate attorney who lives in Florida.  “In Florida, for example, the mortality rate is said by realtors to generate, on its own, a normal turnover rate of about 4-6% per annum of the total housing stock.  If 2% get wrecked for whatever reasons and 4% are built, that means about 7% or so of housing needs to sell each year, just to keep prices stable.  That's a HUGE amount--and since we have not hit the mark, that's why Florida prices are stuck and sometimes still sinking.”

The attorney notes that when "in-migration" to Florida stops (we close the borders to capital flight and retirees cannot sell homes elsewhere--for whatever reason--to move here), the impact is to push Florida real estate down, even when "normal" turnover begins to get covered elsewhere.  This is one reason why the State of Florida seems to LOVE developers who defraud people into buying homes.  It may be crooked, but it increases sales, thus Florida’s civil fraud laws and enforcement are among the weakest in the nation.  

Even in some of the better performing states, the degree of home price appreciation has still not nearly caught up with peak prices seen during the housing boom.  In a report this week in the Los Angeles Times, Andrew Khouri noted that despite a nearly 30% YOY increase in HPA in the Bay area, home prices are still well-below the peaks seen during the housing bubble, leading to a dearth of supply for home buyers:

Home prices in the tech-flush Bay Area continued to post strong annual gains, although at a slower pace than earlier in 2013. The median has held at about the same level since summer. Over the year, prices jumped 23.9% to $548,500 in December.  Although home prices have risen more than 20% year-over-year for 14 straight months, the median price is still far below the $665,000 peak during the housing bubble.  Besides slowing price appreciation, there were other signs the market is normalizing. Distressed sales and investor purchases both declined over the year.

The lack of supply in markets like the Bay area are actually pushing prices higher because of the lack of available homes for sale, but not enough to get back to pre-crisis levels.  

Another factor that analysts and investors need to remember about housing prices and the various price indices used to track HPA is that these are lagging indicators.  My friend Sam Khater and his colleagues at CoreLogic produce an excellent blog on the housing market (  He noted several months ago that home prices in the lower end of the market have been slowing for months, a leading telltale of change in what is a lagging indicator.  Think of home prices as a large herd of animals, with the more attractive homes still moving up, while the inferior homes are slowing or even falling in value.  Sam noted in a recent email exchange about the deceleration in HPA: 

As for the slowdown, irrespective of methodology home prices have always a lagging indicator behind other real estate metrics. Furthermore it’s also lagging in our data (and Case Shiller) because we use a 3 month moving average of closed sales in the public record. So it takes a while for price accelerations/decelerations to show up, but we can see it in some sub-segments of price continuum, like lower end prices which have clearly decelerated.

So what are the takeaways from this analysis?  First, a large part of the improvement in US home prices seen over the past several years is due to the closing of the gap between REO sales and voluntary retail sales.  Now that the REO trade is basically done, the rate of increase in HPA is likely to fall as well – all things being equal.  

Second, the fact that many homes remain under water vs. the mortgage debt on the property is constraining supply, another near-term positive for home prices, but a negative for the US economy.  Indeed, it can be argued that the still large percentage of homes that lack at least 20%  positive equity – the minimum required for a voluntary sale without forcing the debtor to write a check at the closing – is a major obstacle to the Fed’s efforts to reflate the housing sector via low interest rates and “quantitative easing.”

Finally, the clear deceleration of home prices, especially at the low end, suggests that the summer of 2013 was really the peak in US HPA, as analysts such as Michelle Meyer at Bank America Merrill Lynch have reported.  While many analysts continue to predict that home prices as measured by Case-Shiller and other lagging indicators will continue to rise, any increases in these averages will be a function of a few top-performing markets as opposed to a broad increase in HPA for the US as a whole.  Real estate, as the old saying goes, is a local market.

But aside from the outlook for HPA, the key issue for investors and policy makers is how to clear the huge, abnormal overhang of underwater homes that is weighing down transaction volumes and the US economy.  If a third of all US homes cannot trade due to being underwater or not sufficiently above water to clear the mortgage and closing costs for the seller, then the US economy is going to suffer – and it is suffering now, despite what you hear in the big media.  Reduced labor mobility is just one of the drags on US economic growth.  

The underwater component of the US housing stock reported in the statistics is 18% of total or 9.3 million mortgages.  Add another ~ 5-10 million homes below the 20% equity threshold that allows them to trade without the seller writing a check or a total of 35-40% of all US homes.  That is a huge number and equals somewhere between 10 and 20 years of new home construction.  Free immigration might absorb some of that, but without forgiveness of taxation, we'd need a huge inflation cycle in housing to take that monkey off the back of the US economy.  

The last time we had a national calamity in housing like the current 1/3 overhang of underwater and barely above water mortgages was the Great Depression.  It  took until the 1970s arrival of the REIT and tax shelter craze that finally allowed states like Florida to clear the overhang of the land bust of 1927.  As we’ve noted before in ZH, everything and everyone in real estate finance simply "froze" in fear from 1929-41.  The Second World War disrupted normal economics for another decade.  It took until the 1950s and 1960s for growth to get to a point where "inflation" pushed housing up enough to free Florida and other states from the deflationary vise that started to hit it in the late 1920s.  

The Fed has tried to deal with the overhang of housing by stoking up inflation via QE, but that has clearly not worked.  The appalling volume numbers for bank mortgage lending bear grim testament to the failure of QE when it comes to housing and credit creation.  The other alternative is restructuring, but the Fed and most of the banking sector have stubbornly resisted this idea.  We need Congress to respond by changing uniform bankruptcy law and tax law.  Nobody else has the Constitutional power to do what's needed.  Specifically, we need to remove the prohibition on federal judges restructuring mortgage loans in bankruptcy and extend the tax holiday for mortgage debt forgiveness for another five years.  But given that Congress and the Fed are in the pockets of the large banks and institutional debt investors, the chances of this happening are just about zero.  

So to answer the question, has the US housing market recovered?  Well, sort of, but not enough to make a positive impact on growth and employment.  Net, net, the US housing sector remains a net drag on the US economy.  This will not change in the near term unless a miracle occurs and the small minded men who inhabit Congress will take a lesson from the 1930s and start to aggressively restructure the millions of mortgages that remain hopelessly under water.  The incentive to do the right thing is very simple.  If we wait long enough, those under water home loans sitting inside mortgage backed securities and on the balance sheets of US banks will turn into defaults.

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John Law Lives's picture

"Free immigration might absorb some of that, but without forgiveness of taxation, we'd need a huge inflation cycle in housing to take that monkey off the back of the US economy."

Bingo!  This is one primary reason the GOP "leadership" is pushing for comprehensive immigration reform... to bring the illegals out of the shadows and encourage them to spend $$$ freely.  Corporate CEOs want illegals brought out of the shadows.  They also want more cheap labor.

Spygone's picture

Actually this is not the reason at all. The new 'citizens' become debt instruments and are thus used to create a bond as the original bonds are humans or PERSONS themselves.

Thus, more immigration is required because they need to be floated on the open market. This is the same as the prison system, because bonds are made on prisoners as well. It is pretty simple really, the only way to 'pay' the debt, is to create more debt instruments, which the new 'citizens' are a surety against, as is the case with you and your kids and ALL 'citizens' or 'residents' of "THE CORPORATION OF THE UNITED STATES OF AMERICA" which is no different than the sub-corporations that are states, then the subs of that that are counties and munis then... YOU.

No one ever seems to be able to put this together and this will be the backdoor 'solution' to the debt issue of USA yet it is this very system that perpetuates the debt and thus, this massive influx will do the same.

The surety that is the PERSON (the ficititious corporation) is what gives the CORPORATION the 'right' to print more money.  Look around the world the 'older' countries are ALL letting in people by the 100's of 1000's and why?

Because the bankers want their money. If you have something against muslims or mexicans that is here nor there... but don't you find it odd that these are 2 races that do a great job of breeding (making more instruments/bonds) and these seem to be the only ones that make it into the countries (besides africans who are about the same)

when you hear the word 'persons' or 'citizens' you might want to be sure just what exactly that means...

USA bankruptcy was the final move and the original debt pledge was your ancestors...


John Law Lives's picture

"Actually this is not the reason at all." - Spygone


I didn't say it was "the" only reason.  I said it was "a" reason.  Yes, adding to the labor pool / empowering these consumers most certainly is "a" reason CEOs cite in support of immigration reform.

Here is the recently declared position of The Business Roundtable, a group of 208 CEOs, headed by AT&T CEO Randall Stephenson on this very topic:


"Congress should fix the broken immigration system to create a larger pool of visas for higher-skilled workers, enact a new visa system for lower-skilled workers, offer a path forward for undocumented workers already living in the United States, and allocate greater resources to strengthen enforcement and secure our borders. Done right, reform can increase our economic growth rate, reduce our deficit, and contribute significantly to America’s future."

ArkansasAngie's picture

Poor people do not pay for themselves.  Most immigrants are poor people.  Ergo immigrants don't pay for themselves.  They do create demand for moar free stuff

John Law Lives's picture

CEOs want illegals to be legalized so they can become legally employed by corporations.  They believe legally employed immigrants will purchase more goods and services than they otherwise would.

new game's picture

ps. rcwalen-thanks for the excellent article and the link to core logic(nice).

former r.e. broker over twenty years...

dexter_morgan's picture

Some friends sold their townhome (was up for sale at $345k few years ago) for 260k and had to PAY to close the deal. The buyer was a cash buyer, but betwwen RE taxes and association fees, the old gal that bought their house will be paying > $1k/mo (chicago suburb so RE taxes VERY high) just for the privilege of living in her 'paid off' home. Then you add utilities, remodeling, etc, etc. And if don't pay the taxes you'll soon find out who DOES own the place.

American dream of home ownership has become nightmare for many.

new game's picture

what is not spoken here yet is interest rates-especially where the markets are hottest, ie most stable, the buyers have decent jobs still and rates of 3(5/1 arm) and 4 on the 30 are what is driving this. its the financing stupid(vs rent). almost survival by manipulation(the fed), with intended consequesce. is it out of control(echo bubble)?, well i doubt it will happen(equity as mentioned in article) and incomes...

bump along with retrace as hot money(first wave of reo flips and wall st rentals) are done. the patient has stableized for the time being.

along as politicians use homes as a stimulas tool we are destined to this boom bust cycle...

oh yea, fuck the fed

Sick's picture

What we never hear and must realize is that the FED and the banks are one in the same.  The FED is a private company staffed by bank members for the good of the banks.  This has to end and will end to the detriment of the USA citizens.

novictim's picture

Nice article.  

However, the"all cash" (in reality preferred loan) investors that are snapping up oodles of homes on the West coast to turn us into a rental nation and to get a vice-grip lock on the home market to later manipulate the market from a monopoly posisiton could have been explored here.


I think that when we define "housing recovery" as increasing home prices (ala HPA) then the first time home buyers must think it's an Orwellian manipulation.  When water prices go up on the West Coast and plain states due to drought, do we think of that as a "water recovery"?


What happened to the valuing of affordability?  We are talking about one of lifes three necessities (food, clothing, housing) being traded out from under working people as just another commodity.  This is a recipe for disaster.

combatsnoopy's picture

I love how experts are embarrassing themselves. 
So how does housing "stimulate" the economy?

Oh honey, stimulate me with that house.  4 bedroom aphrodisiac yo!  That's haute!   Apparently this is why many of them get trapped in honey trapped plots where CASH becomes the inevitable aphrodisiac. 

No seriously.  Houses can't produce, labor, innovate, invest, market, sell, advertise, do the books or PROVIDE LIQUIDITY (houses for "investments" are INVENTORY which is illiquid)--- houses are just inanimate objects.  Sad that the goofy Duhmaericans get that 1035 on unregulated real estate "investments" and a whopping high tax rate on corporate backed investments. 

I don't want to talk about duhmerica anymore, it's a putoff. 

Singelguy's picture

The theory is that housing has wide ranging domino effects. If you buy a house you need a realtor, lawyer or title agent, mortgage broker, banks to provide the financing. Once the deal is closed, you move in, paint, wallpaper, buy new appliances, maybe do some renovation in the kitchen and bathrooms. This all creates a lot of work for people. That may not be true in this economy. Buyers can barely scrape together the down payment and closing costs ( normal buyers, not hedge funds or REITS) so the domino effect is little or nothing.

PT's picture

I like to fall back to Detroit when combatting this argument.  The cars led to the houses.  The houses did not lead to the cars.  Build as many houses as you like in Detroit.  Will that make the cars come back?

dexter_morgan's picture

well, it still has a domino effect, just not the one desired

hidingfromhelis's picture

Gotta love the National Association of Realtor's official talking point.  Good on you for recognizing it may not hold with current market conditions.  I'd go a step further and say it was stretching credibility even during the boom/bubble years.  

doctor10's picture

If you can't dig it, drill it, or plant it-you haven't got anything. Planting stick built McMansions in cowpastures does'nt do anything for the economy.


If "they" had just taken all  those trillions of dollars they threw at the TBTF banks since 2008-and paid off all commercial and residential mortgages in the country-we'd at least have had  5 years of something to show for it-and no MDS derivative crisis. So much for the Ivy League and Wall St whizzz kids and rocket scientists

Vendetta's picture

"If "they" had just taken all  those trillions of dollars they threw at the TBTF banks since 2008-and paid off all commercial and residential mortgages in the country-we'd at least have had  5 years of something to show for it-"

Exactly, but then everyone would be screaming 'socialism' ... oh wait     but it would have made use of the money instead of the black hole they dumped it all into.

Atlantis Consigliore's picture

Everyone is fleeing and It is all local:  if no one can sell it will be a rental mkt only; Demographics, Illinois Chicago has 1,000,000 left past 40 years,

200,000 fled past 10 yrs; 

Chicago has a $ 300 M deficit in 2 years blown to $ 1 Billiion, everyone is fleeing, the taxes, red tape, tickets, cameras, restaurants are collapsing.  

the BK inner cities will resort to huge income tax increases/ with 1% income tax rates like New Yawk; LA or Chicago, Next, 

1% income taxes,  and default on pension obligations,  as there is Flight again like the 60-70's to the suburbs;

there wont be commute, reverse commute or any commute and there will be a 6 month and 10 days rental market 

in non income tax states as homes are put in trusts,  and passed on as feifdoms to relatives, children, tax free;

the real estate bite by the Crooks and Politicians is over for real estate. Florida Vegas, etc will be rental only. 

1/2 the foreclosed homes are empty anyhow as are those in Florida, full of mold. 

lasvegaspersona's picture


I was one of the first out of Chicago. I could smell the rot starting back then. It was not racial or economic, it was the filth of politics. Out of bad politics oly bad things can come. Not even a bit of altruism, only power lust, nepotism and greed seep from Chicago.

Richard Daley (the first), after giving one of his kids a plum job, was quoted as saying 'if you can't help your own kids who can you help'? No one disagreed, they just nodded knowingly. I left.

kaiserhoff's picture

Case-Shiller is an URBAN index.  In my area, where cities are far smaller than those in the index, stuff in town is holding up pretty well, but housing in surrounding rural counties is dropping like a rock.  I'm still trying to figure out why.

This is a good piece except that it misses the elephant in the room, demographics.  The young are not getting married or buying first houses at anythng like traditional rates, but old folks are dying at traditional rates.

The cash buyers are hedge funds, very hot money,  or nubes, who have no idea how hard it is to profit renting single family housing.  All this "cash" stuff will come screaming back to the market, soon.

WhyDoesItHurtWhen iPee's picture

They had the chance 07-08.  Now it's way too late.  It's broke from the bottom rung up.  Who is going to buy that starter home?  The indentured college graduate?  Maybe the $10/hr worker getting a 29.5 hr work week.  The "American Dream" is vaporized bro.





Seasmoke's picture

Lots more defaults coming. Lots and lots !!!!!

Al Gorerhythm's picture

One big "doer upper" will certainly be the United States when it defaults (again). Will buy it for a song. 1 ounce of AU should do it. Nix in Knox I'm betting,

A Nanny Moose's picture

I thought exactly this in 2008-2009.

Lots moar bailouts coming.

There, FIFY

novictim's picture

Where and When?  And how do you know that?

kaiserhoff's picture

Don't want to answer for seasmoke, but it my area carrying costs are way up, especially taxes, utilities, and maintenance.

Full time jobs are way down. Lots of desperation in the seller's ads.  Plenty of short sales.

Handful of Dust's picture

I hear that. Property taxes are now over 3.7% where I live and utilities and home insurance costs are soaring!

Richard Chesler's picture

Just wait until Obozocare clusterfucks.


max2205's picture

No they will turn to dust if we wait long enough