Three Reasons Why The Housing Recovery Dream Is Overdone

We know its is blasphemous to question the NAR and given the dismal state of the manufacturing sector data in the US in recent months, the entire recovery now seems predicated on good old 'residential real estate' rising phoenix-like from the ashes of negative equity. Goldman's Jan Hatzius ignores the 'see no evil, hear no evil, speak no evil' of the mainstream media's call for a glorious recovery in housing and lays out his own three monkeys. While recent data is encouraging, he is far from sounding the all-clear as the massive instability of seasonal factors; the gradual nature of the 'turn' and wide dispersion between strong and weak markets; and housing's considerably less important role in the broad economy (and macroeconomic spillover wealth effects); all leave the Goldman economist unamused as he sums up his perspective quite succinctly: "while housing may be getting better, it's no longer about housing."

Jan Hatzius, Goldman Sachs: Are House Prices Finding A Bottom?

While the recent house price news is encouraging, we would not yet sound the "all clear" for the housing market or the broader economy.

First, the instability in the seasonal factors over the past few years is a potential source of noise in the recent house price indicators, and also in our model. As shown in Exhibit 2, the seasonal factors in the Case-Shiller home price index have shifted substantially since 2007. The reason is the increase in distressed/foreclosure sales. Since distressed sales account for a much bigger share of total sales in the winter than in the summer, and since distressed properties are typically sold at lower prices, the increase in distressed sales since 2007 magnifies the seasonal pattern of higher prices in the summer and weaker prices in the winter. In addition, the seasonal factors can be also distorted by one-off items such as the 2009-2010 first-time homebuyer tax credit, the foreclosure moratorium taking place in the fall of 2010, and the warmer and dryer than usual winter this past season. All of these complications make it more difficult to assess than under normal circumstances whether the seasonal factors are too large, too small, or just right. This adds to the uncertainty as to whether the better recent numbers indicate a true turnaround in the US housing market.


Exhibit: The Magnitude of Seasonal Factors for the S&P/Case-Shiller 20-City House Price Index Increased in Recent Years


Second, even if the market is gradually turning, as our model implies, the difference between a slightly declining and a slightly increasing national average for home prices is minor, especially given the wide variation between stronger and weaker markets. Our broad view remains that national home prices will remain close to flat over the next 1-2 years, or at a minimum that the recovery will remain very "U-shaped."


Third, the housing market is less important for the broader economy than it was a few years ago. Homebuilding now only accounts for 2.3% of GDP, compared with 6.3% at the peak of the cycle. Thus, even a rapid percentage gain in homebuilding only has a moderate direct impact on GDP growth. Moreover, the macroeconomic spillovers of changes in house prices via the housing wealth effect are considerably smaller than they were a few years ago, given the absence of mortgage equity withdrawal (MEW) as a conduit for translating wealth gains into higher consumer spending. Lastly, the impact of house price changes on the availability of credit via bank balance sheets is probably also smaller than it was a few years ago, as banks have already recognized large losses on mortgage loans and mortgage-related securities and housing-related assets feature less prominently in their balance sheets.

For these reasons, the gradual turnaround in the housing market does not alter our expectation that the US economic recovery will remain sluggish, with real GDP growth averaging 2% through the end of 2013 and risks that are tilted to the downside of our central forecast, at least in the near term.

Put simply, while housing is getting better, it's no longer all about housing.