The latest U.S. economic soundings – including stunning January job numbers that far exceeded the most enthusiastic forecasts – are pointing to something quite remarkable. The long-stumbling giant may finally be on the road to a sustained recovery without any help from housing.
Whether this rebound turns out to be real or ephemeral won't be clear for some time. The jobless rate fell to 8.3 per cent last month, a level last seen three years ago. But that's still high by recovery standards. And such key gauges as average hourly earnings and weekly hours worked barely budged.
Still, even the more bearish economy watchers were left momentarily speechless. "I can't sit here and quarrel with the data," David Rosenberg, Gluskin Sheff's expert data miner, told clients before proceeding to poke a few holes in any budding bubbles of optimism.
Not so long ago, Mr. Rosenberg and others of pessimistic persuasion would simply have highlighted the continuing woes of the battered U.S. housing sector to help make their case for further economic weakness. After all, a resurgence in housing and related consumer spending led the way out of just about every previous American slump going back several decades. Now, it's as if the rest of the economy is tired of waiting for the old engine to fire again.
"The fact that we're doing it without the housing market is really astounding," says prominent housing economist Karl Case, who is best known as co-developer of the influential S&P/Case-Shiller index, which tracks changes in resale home prices in all the key U.S. markets. "I think people aren't paying enough attention to that."
Prof. Case, who has estimated that each dollar directed into a new home creates about $1.40 in economic activity, was among many experts who regarded such a divergence as all but impossible.
During the bubble years of the early to mid-2000s, "we just got so enthralled with the notion that house prices do not fall, that we way overshot the mark – in quantity, prices, risk scores, credit availability and everything else. We created $10-trillion in additional housing value." Needless to say, this had an enormous economic impact. And then it suddenly ended.
Prof. Case likens the ensuing result to putting both feet on the car accelerator, adding a turbocharger and then abruptly shutting off the engine.
Interest-sensitive housing had long served as the means through which the Federal Reserve could steer the economy toward faster or slower growth. As soon as rates fell, housing starts picked up. A hike in rates always translated into fewer starts. Until the bubble burst, that is.
"It was the instrument of monetary policy for 30 years," says Prof. Case, senior fellow with Harvard University's Joint Center for Housing Studies. "Now, it's non-existent. We overbuilt. We overpriced. We're not producing anything."
U.S. housing starts reached 2.37 million annually in January, 2006. Today, the number sits well below 700,000, at or near a 60-year low, where it has largely been stuck for more than three years. The latest data show that starts fell 4.1 per cent in December to 657,000 on an annual basis, a fitting finish for the most dismal year on record for single-family construction in the U.S.
After years of such gloom, the shrinking housing sector today accounts for about 2 per cent of the U.S. economy, down from 6 per cent before the collapse. "That's hundreds of billions of dollars of demand just wiped out," Prof. Case says.
No one gets more passionate discussing the ups and mostly downs of a market he has monitored closely for more than 30 years. "It's stuck in the mud, which is bad for the housing sector. But it's good if you want to get the market cleared, because we're producing effectively zero [net new housing]" he says in a rising voice.
Sifting through recent data showing improved sales and pricing in some markets, as well as a slight increase in long-depressed household formation – the recovery of which is essential for higher demand – a growing number of analysts have concluded that housing may finally have hit bottom and embarked on the long trek out of the deep valley. If true, it would only enhance the chances of sustaining a broader economic recovery.
Seasoned investors know how tough it is to call a bottom in any asset class, let alone one riddled with so many unknowns. It will take years to clean up the mess that is U.S. housing. And despite somewhat better numbers of late, there's still a long way to go, Prof. Case says.
But pockets in various parts of the U.S. are in reasonable shape, and there is at least a chance that the broader property market will be on firmer ground by the spring.
"It's definitely more positive than it was," Prof. Case says. "It doesn't mean it's a recovery, but it does mean that the rate of decline has been slowing. I think it's going to go flat. There are prices rising in some markets."
Meanwhile, the U.S. economy will have to find its own route to higher ground, while its former trusty scout scrambles for a foothold far below.