A Headache Over Housing?

Story Highlights:

• Housing concerns continue to plague many investors as housing data remains weak.
• However, the housing bubble wasn’t the primary driver of 2008’s recession, and a weak housing market today shouldn’t be a powerful enough driver to stymie continued economic growth.
• Positive drivers like personal consumption, business investment and trade activity, have a far larger impact on the economy.

The hangover from the housing bubble’s collapse continues to plague some investors, and at glance, the numbers still aren’t glowing:

• April new home sales figures in the United States rose for the second straight month but were still below the historical average.
• Year-over-year new home sales were down sharply in April, falling -23.1% since April 2010. (Granted, those numbers were distorted by the sunset of a tax subsidy for first-time buyers, which likely pulled some sales forward.)
• Absent a material rise in the latter half of this year, 2011 will mark the sixth year in a row of new home sales declines.
• The 323,000 new homes sold in 2010 was less than 60% of the number of new homes sold in 1963, even though the population today is nearly two-thirds bigger.
• Many builders also face increasing pricing pressures from previously owned homes, which cost less and are thereby more appealing to some buyers. (Sales of previously owned homes don’t directly contribute much to GDP growth.)

To cap it all off, looking forward, despite low interest rates and improving delinquency trends, longer-term supply and demand imbalances remain—and will likely take time to work through.

We won’t downplay the concern for those directly engaged in the real estate industry (construction workers have been hard hit in the downturn), but one has to be careful about extrapolating housing’s influence to be larger than it really is. Yes, it’s true housing played a role in 2008’s recession—it was a material contributor to the backdrop, but not the principal driver. Rather, it was principally the impact of FAS 157 on banks’ balance sheets and uneven government actions that largely drove the panic.

Looking forward, a protracted housing malaise isn’t necessarily a factor that has the power to stymie the ongoing equity bull market or continued economic expansion (as we’ve said before). For stocks, it’s underappreciated, material fundamental developments that matter most in the longer term—and there are likely few investors who aren’t aware housing’s been weak. Economically, the US today is bigger than it was at its pre-recession peak. And it recovered without the benefit of a strong housing market—in fact, with ongoing housing weakness. How did that happen? While a housing recovery would provide a nice incremental economic tailwind, it has a far smaller impact on the economy than many believe: In Q1 2011 housing accounted for a mere 2.2% of US GDP.

nd exports—have a much larger impact. Perhaps most importantly, the powerful structural trends driving global economic growth remain intact and seem poised to continue serving as the foundation for US expansion.