Cooling the engine?
As the housing boom levels off or dips slightly, less significant than the impact on reselling homeowners is its cooling effect on the nation’s economic engine, as illustrated by this helpful New York Times story:
The housing industry — which largely carried the American economy through the tribulations of the 2000 stock-market crash [’Crash’ — Ed.],
What stock market crash?
a recession and climbing oil prices — has lost its vigor in recent months and now has begun to bog down the broader economy, which slowed to a modest 2.5% growth rate this spring.
That was a sharp comedown from the 5.6% growth rate of the first quarter, the Commerce Department reported yesterday, caused in part by the third consecutive quarterly decline in spending on houses and apartment buildings, after several years of rapid growth.
While a home that is built can simply stay on the market longer, the real implications are in the homes planned and not yet built:
“It hasn’t slowed down a little bit — it has slowed down a lot,” said Doug McCraw, a developer who has scrapped his plans for a 205-unit condominium tower in a neighborhood just north of downtown Fort Lauderdale, Fla.
Land has an extremely low holding cost — it never becomes technologically obsolescent, nor does it suffer pilferage, and you can leave it out in the rain without hurting it. So a builder who can wait, does so:
“Anybody who did not have a shovel in the dirt has chosen to wait till the market settles.”
A builder who cannot wait sometimes walks away:
At Hovnanian Enterprises, one of the nation’s largest homebuilders, executives are renegotiating the company’s options to purchase land for future developments, in an effort to delay some transactions and reduce the purchase price on other parcels of land. In April, it forfeited $5.6 million in deposits on property near
Housing is a two-pronged driver of economic demand:
· Home equity refinancing gives customers more money to spend.
· New home construction creates good-paying (if seasonal) jobs.
If only it were that easy!
It’s a huge sector:
While the fate of housing prices has received far more attention recently than real estate’s role as an engine of job growth, the sector has also become one of the country’s most important industries. Residential construction and all the activity that swirls around it — mortgage lending, renovations and the like — account for roughly 16% of the economy, making it the largest single sector, slightly bigger than health care.
Housing is the green wedgie.
When one-sixth of the economy takes a breather, the ripple effects are immediate:
“Housing is going from being far and away the most important contributor to growth to being a measurable drag, and it’s happening gracefully so far,” said Mark Zandi, chief economist of Moody’s Economy.com, a research company. “ But there’s now a growing and measurable risk that things don’t go according to plan.”
From the standpoint of a policymaker like my classmate Ben Bernanke [Show-off! — Ed.] [Hey, isn’t the point that he’s achieved so much more than I have? — Auth.], housing is a terrific modulator, because it’s so easy to manipulate, via interest rates:
“Rates go up, rates go down … that’s for me to know and you to find out.”
The average rate on a 30-year conventional mortgage was 6.8% last week, up from 5.7% a year earlier, according to the Fed.
[E]ven modest increases in mortgage rates have the potential to cause a significant drop in demand for new houses.
Common innumeracy mistake, thinking that 110 basis points is ‘modest.’ An uptick from 5.7% to 7.8% is equivalent to as much as a 17% drop in value (oversimplifying by focusing on the interest rate, not the debt service constant).
The housing slowdown is perhaps the clearest effect of the Federal Reserve’s two-year campaign of raising interest rates in a bid to tap the brakes on the economy and reduce inflation.
Whoa, there, economy!
Because affordability is measured by monthly payments, the buying and selling of homes is influenced much more by interest rates than any other factor. Raising them in small increments, as the Fed has done, can be a precise and effective way of cooling demand.
That campaign has been largely successful, with the decline happening gradually while other parts of the economy, mainly the corporate sector, pick up much of the slack.
Under control so far.
The fact that mortgage rates remain low by historical standards offers one reason to doubt that a crash will happen.
No, that’s Ben, not you, Wile E!
