BusinessWeek downplays the effect of the housing slowdown
The worry is the housing slump, which appears to be getting worse, will drag down the entire economy.
Housing starts sank further in July. Permits to begin new construction plunged close to a four-year low, and an industry measure of builders’ sentiment sank to a 15-year low. Forward-looking indicators from declining mortgage applications to depressed attitudes of potential home buyers to moribund buyer traffic in model homes indicate more weakness to come. But as the numbers so far suggest, weak housing does not necessarily mean a soft economy.
This housing cycle is different. In the past, housing downturns have been the result of high interest rates and broad economic weakness leading to rising unemployment. This time, housing is going through its own cycle, largely independent of wider economic conditions. The economy outside of housing remains solid:
- Unemployment is low,
- household incomes are growing, and
- 30-year fixed mortgage rates, at a bit over 6.5% in mid-August, are hardly onerous
- Industrial production in July continued to gain momentum, not lose it, and the operating rate for all industry hit a six-year high.
- Consumers responded to sweet deals on autos in July, even as they boosted their spending on other retail items.
- Foreign demand also remained strong, as June exports posted another big gain.
- Second-quarter profits of companies in the Standard & Poor’s 500-stock index racked up a solid advance of nearly 13% from a year ago, even excluding the energy sector.
These reports hardly point to a broad moderation in economic activity.
This housing recession is primarily an inventory correction, as builders adjust to the aftermath of the demand frenzy in previous years. This is squeezing prices of new homes, with attendant effects on existing home prices. However, the sharp drop in housing starts of more than 20% so far from the January peak implies builders are moving quickly to realign their stocks of unsold properties with the lower level of demand. The faster the adjustment takes place, the quicker the downward pressure on home prices will ease.
One interesting point is that the housing downturn has not been accompanied by weakness in retail sales of home-related items. So far this year, sales at furniture and appliance stores have grown 13.1%, measured at an annual rate, and purchases at stores selling electronics and appliances are rising at an 11.6% rate. Both growth rates are more than double those for all of 2005. Moreover, sales at building materials and garden equipment stores are up 9.4%, only a bit below last year’s 10.3%.
Clearly, housing is exerting a drag on overall growth. But if the slowdown scenario envisioned by investors is going to play out as expected, there will need to be a lot more signs of softness outside of housing. So far, those signs are far from convincing.
