- Recent data shows the residential real estate sector continues to experience problems.
- Dour headlines tend to strike fear across households because the majority of Americans are homeowners and home values represent a significant percentage of household balance sheets and net worth.
- However, from an economic growth standpoint, residential fixed investment has a small weight in total US GDP—3.3% as of 2008 Q3.
- Real estate booms and busts are common, but real estate doesn't necessarily affect stock market recoveries. Said another way, there's no need to wait for a housing bottom for stocks to bottom.
Lest the financial crisis and Detroit automakers' bleating horns detract you from the longer-standing housing sector woes, the latest government data sharply calls to attention residential real estate's continuing deterioration.
Dour headlines tend to strike fear across households because, well, it hits home. Puns aside, roughly two-thirds of American households are owner-occupied and a home's value represents a significant percentage of household balance sheets and net worth. However, from an economic growth standpoint, residential fixed investment has a small weight in total US GDP—3.3% as of 2008 Q3.* Compare that to non-residential investment, which makes up almost 11%. According to the Bureau of Economic Analysis, non-residential structure building activity increased 9.7% for 2008 Q3. (We'll know more about fourth quarter results next week.)
Stock investors worried about residential real estate's continued ramshackle state can perhaps take some solace in knowing real estate prices don't drive stock markets. Said another way, there's no need to wait for a housing bottom for stocks to bottom. For example, the housing downturn in the early 1990s hit bottom in July 1992, but markets were up 1991 and 1992.
Real estate is not removed from the business cycle. Boom and busts are common. Prices, starts, and a host of other real estate gauges and measurements will continue to deteriorate until existing housing market imbalances (over 1.5 million empty homes are currently for sale in the US, for instance) are brought closer to equilibrium.
None of this is to say a housing market downturn isn't a negative for the economy. But encouragingly, Fed and government actions are reducing some pressures—recently reported long-term mortgage rates are the lowest in 50 years. And recently, the Mortgage Bankers Association's refinancing gauge and the number of applicants seeking to refinance reached highs. Perhaps another positive is current conditions offer new homebuyers a historic opportunity. And let's not forget nearly half of all homes are owned outright, without mortgages.
The US residential real estate sector is proving to be a real fixer-upper and will take time and patience to repair. Real estate data won't get better anytime soon, but housing wobbles won't necessarily hold back the economy or stocks in the meantime.
*Source: Bureau of Economic Analysis