Housing Stall Continues, But Recovery to Resume

At 590,000, September housing starts remained at the June-August level, according to today's U.S. Census Bureau and U.S Department of Housing and Urban Development new residential construction report. At 573,000, September housing permits remained at the June-August level.
This stall in the housing recovery was expected. The initial recovery surge was jump started by federal pump priming in the housing and consumer markets. Without additional federal housing or consumer subsidies, the subsidies can not push housing starts higher. And housing permits and starts will slip lower when the subsidies expire later this year unless there are fundamental improvements in economic conditions. Reed Construction Data still expects enough improvement in income and confidence later to year to offset expiring subsidies and to resume the housing recovery.
Without legislative changes, the $8,000 first-time-home-buyer tax credit expires in six weeks. There may be a burst of October-November homes sales from this program, but the impact on housing starts is now largely over. A variety of state and federal foreclosure moratoriums are now expiring, which will put hundreds of thousands of homes back on the foreclosure track. Also, many of the 100,000-plus homeowners who got federally subsidized mortgage adjustments will fail to keep up payments during the three-month probation period ands will soon return to the foreclosure track.
But these negative headwinds will be offset by fundamental improvements in the economic environment in the housing market. The improvements include rising household wealth, consumer confidence, home prices in an increasing number of housing markets and inflation-adjusted income -– all coming from the self-correcting cyclical mechanisms in the economy.
Falling prices, rising exports and double digit annual growth in manufacturing are keeping real income rising slowly even as nominal income continues to decline. The wealth impact on spending will be increasingly significant in the next six months of recovery just as it was when the economy was declining. With a considerable lag, households spent about 5 percent of additions to wealth, once they are perceived to be permanent. Consumers now believe that the recent small rise in home prices and large rises in equities prices are sustainable trends and will boost spending slightly.
The housing recovery will resume in a few months. Single-family housing will be the fastest growing construction market in 2010. But the level of housing starts will remained depressed below the underlying demographic trend for several more years.
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