Housing recovery may take longer than usual

John W. Schoen Senior producer • Profile • E-mail

There are signs that the housing market may finally be hitting bottom, including this week's report that sales of existing homes rose in April from March levels. But there are also signs that the recovery may take a lot longer than usual.

CNBC cited a “refi boom” as perhaps signaling that the worst is over for housing. It seems to me that exchanging debt for debt, even reduced slightly over time, does not do much to put more money into the economy. The only case I could make is that there is again money to borrow, but again, how does that help the economy in general?
— Brian P., Seattle, Wash.

The increased borrowing is a good sign, but it’s not the only one. The biggest benefit to the economy from refinancing is the household spending money that’s freed up from paying higher mortgage-interest payments. Consumers can now use that extra money to save or spend. (In the short run, spending is the better for economic growth.)

Banks are beneficiaries, too, which helps rebuild the financial system and promote more lending. It’s true that a bank holding a mortgage getting refinanced loses out on future interest when the loan is paid off early. But most newly refinanced mortgages carry hefty upfront fees, which go straight to the bottom line of the bank writing the new mortgage. That infusion of cash is helping to fill in the multitrillion-dollar hole in the banking system that needs to be replenished before lending can get back up to speed.

None of this, however, does much for the housing industry. For that you need to see a pickup in new and existing home sales. About the best you can say on that front is that it looks like the pace of sales may have stopped falling. In April, homes were sold at an annual rate of 4.7 million — a bit better than March's level but down from 6.5 million in 2006, according to the National Association of Realtors. The median price of $170,200 was 15 percent below year-ago levels, as nearly half the sales were for "distressed properties" that typically sell at a deep discount.

Home sales add a big boost to the economy beyond the fees earned by real estate agents and mortgage brokers. Home buyers typically also spend money on new appliances, furnishings, repairs and improvements. Buyers of new homes create even more economic activity as the sale price covers wages for all of the contractors and laborers who built the house and as well as materials and supplies.

In April new home construction fell to a record low annual rate of just 458,000 units — down from a rate of more than 1.4 million as recently as 2007.

Even if low mortgage rates spur demand for new homes, builders face a huge overhang of existing homes on the market. In the first quarter, there was nearly 10 months' supply of unsold homes listed. That’s up from an average 6.5 months in 2006 and 4.5 months in 2005. As the housing market shows signs of improving, there may be more listings coming from homeowners who have been hoping to sell but waiting for the market to improve.

In past recessions, the pickup in home sales has been an important foundation for the economic recovery that follows. This time around, the recovery may lag somewhat — largely because home prices are still falling. As of March (latest data available), the S&P Case Shiller home price index was down 32 percent from its peak in June 2006 and still falling.

The loss of trillions of dollars in home equity — the bulk of most Americans' savings before the housing market collapsed — is going to put a damper on consumer spending even after the housing market gets on its feet again. That’s why many forecasters are expecting only a weak recovery later this year and into 2010.

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