Housing Humdrum

Story Outline:

• Today's headlines featured more bad news on the housing sector.
• Despite widespread belief a housing slowdown has caused a credit crisis, lending activity remains robust as borrowing costs are dropping.
• Residential housing doesn't have the economic impact investors fear. Meanwhile, commercial real estate growth is more than making up for the residential slowdown.

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Despite today's healthy market performance, bad housing news just keeps on coming. Troubled lender Countrywide reported a big loss for Q4, home prices are dropping, and then there was this headline:

Foreclosures up 75% in 2007
By Les Christie, CNNMoney.com

Yes, foreclosures are rising, which spells trouble for those particular homeowners. But does it spell trouble for the broader economy? Though the foreclosure rate is hitting fresh highs, it's still below 1%—hardly alarming. And that's not even 1% of total homes, but total mortgages—many homes are owned outright.

But isn't the rising foreclosure rate proof positive we're in a credit crunch? In a true credit crunch, we'd see rising rates across the board and a drop in lending activity. But lending in all categories rose in Q4 2007—right when we were supposed to be in the throes of a credit crisis. (See "Debt Disbelief,"01/23/2008.) And though junk rates are higher, borrowing rates for average and above-average public firms are lower than 6 and 12 months ago. Junk bonds represent a relatively small portion of overall credit markets—just about 10%. On a weighted basis, borrowing rates overall have fallen—even for private individuals! Fixed rate mortgages are hitting new lows too, and with the Fed's recent cut (and another cut possibly looming tomorrow), other forms of borrowing are cheaper too. What we're seeing isn't a credit crunch, but a credit reallocation to less risky borrowers, as is quite normal in a maturing bull market.

What about this scary headline?

Home Ownership in Record Plunge
By Chris Isidore, CNNMoney.com

Year-over-year we had the biggest drop in homeownership since 1965, which sounds bad, until you realize we've gone all the way back to the homeownership rate we had in . . . 2002. There was nothing troubling about the rate of homeownership in 2002, and there's nothing troubling about it now. Throughout history, we've had lower rates of homeownership, coinciding with perfectly fine periods for the economy and stocks. It's only recently the idea developed that GDP was so closely intertwined with homeowners' fates.

Is it? The largest component of GDP is driven by consumer spending, which ties much more closely with wage growth than any other factor. And American wages and per-capita net worth are at record highs—even after the drop in home prices. (See "Feel the Flow," 12/11/2007.) But a slowdown in home construction has to impact GDP materially, right? Not really—residential homebuilding constitutes just 4.5% of overall GDP. If all homebuilding were to stop, immediately, that would give GDP a good one-time whack. But what are the odds homebuilding ceases in its entirety? Pretty slim. Plus, commercial real estate has been growing leaps and bounds, more than making up for the slowdown in residential real estate—a fact you don't hear very often.

We continue to believe the fear of a housing slowdown and incumbent credit crisis are bigger than the things themselves—and that fear is contributing to near-term volatility. Fear is very powerful in the short-term, but in the longer-term, fundamentals tend to win. (See "A Question of Semantics," 01/28/2008.)

Folks have been predicting recession for over a year—yet when GDP growth comes in positive they say, "Well, not this past quarter, but this next quarter surely is when doom arrives." They can play this game forever, and eventually they'll be right—stopped clocks and all. But that doesn't mean they'll be right today. We'll know how Q4 fared soon enough, but we remain confident that, even if Q4 was more sluggish than rip-roaring Q3, overall growth in 2008 will likely beat today's meager expectations.