Economic Update: Real Estate - How critical is it to the strength of the economic recovery?
08.21.2009
Real Estate Showing Signs of Stabilization
National indicators are now pointing to stabilization in the housing sector. A national homebuilder’s index that measures builder sentiment continues to show small increases, and national home sales appear to have reached a bottom.
As the nation exits the current recession, real estate will serve a key role in determining the strength or rapidity of the recovery. Significant declines in household net worth, due to declines in home values and stock values, are triggering a massive restructuring of household balance sheets resulting in less consumer spending. Consumers will be motivated to spend as their wealth is recaptured either through home values or the stock market. This is precisely why real estate will serve a critical role in determining the strength of the recovery. However, as we have stated numerous times in this column, this consumer retrenchment is more of a structural change rather than cyclical. Hence, any recovery is going to be slow, and will resemble the wide U that we’ve mentioned in the past.
The credit bubble created a construction boom in many regions throughout the country, and we saw the same locally. Figure 1 below shows building permit activity for Floyd and Clark counties (3 month average). Notice the monthly volume from 2004 to 2007 and the immediate drop in activity in late 2007. Building permit activity is quite volatile from month to month, but the last few months did see a slight tick upward in overall building permit activity. We observe the same for Louisville Metro (Figure 2). Overall, building permit activity is about 25% of the total volume observed during the peak years of 2002 and 2005.
Figure 1
Figure 2
National home prices appear to have reached a bottom. Various national price indices point to such a bottom. Fox example, the National Association of Realtors data show that median home prices appear to have reached a bottom during the first quarter of 2009. Figure 3 shows median home prices for the US and Louisville Metro as compiled by the National Association of Realtors. Similar to the US, Louisville Metro did see an increase in median home prices from Quarter 1 2009 to Quarter 2 2009.
Figure 3
Another price index often cited is the FHFA Home Price Index. This index is based on repeat sales or refinancing of the same property, and only includes mortgages that have been purchased by Freddie Mac and Fannie Mae. Unlike the National Association of Realtors Median Prices, the FHFA Home Price Index continues to show declines in real estate values (See Figure 4).
Figure 4
Update on updates
Now for some shameless plugs on our Economic Update column:
We mentioned some time ago in this column that the recession would likely end around July or August. Recent national press reports cite national economists now indicating the same.
Several weeks ago, we mentioned that a recovery in manufacturing was on the way, and that this would be led by inventory restocking. National statistics are now pointing to this recovery in manufacturing.
During our November Outlook program, and several times in this column, we discussed the “structural retrenchment” of the consumer. We continue to see soft reports in retail sales and consumer spending in general.
We made a call during the late spring that we probably reached a bottom on monthly employment losses. This appears to have occurred nationally, and Louisville Metro data are pointing to a bottom as well.
Suggestions
If you have any suggestions on future columns or research about specific industries or other economic data, please send me an email at udufrene@ius.edu.
###
This information is provided by
Uric Dufrene.
Uric Dufrene, Ph.D. holds the Sanders Chair in Business in the School of Business at Indiana University Southeast. He conducts research on local and regional economic trends, and teaches corporate finance at the undergraduate and graduate levels. He previously served as dean of the School of Business.
|
