US Housing Market Losing Economic Influence

While real estate analysts continue to compare notes on whether the U.S. is glimpsing the first hints of a recovery, some experts are arguing the benefits of the …

While real estate analysts continue to compare notes on whether the U.S. is glimpsing the first hints of a recovery, some experts are arguing the benefits of the silver lining, which is that the shrinking housing market is having less of an impact on broader economic growth. Studies show that the U.S. GDP is bigger now than at its prerecession peak, which suggests that housing is not playing the role in economic expansion it once did. It is also argued that housing will have less of an impact on stocks and investments. The best news, say these optimists, is that the outlook for housing and the economy at large are both good and that 2012 should be a year of improvement. For more on this continue reading the following article from TheStreet.

The U.S. housing industry has been weak — news that shouldn’t surprise anyone.

However, recent data have shown some improvement.

Whether this signals a corner turned in the housing market remains to be seen.

But Fisher Investments research suggests that while a robust housing market recovery would be additive to growth, it’s not necessary for ongoing economic expansion.

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For example, even though housing has been a fairly consistent weak spot the last few years, the U.S. (and global) economy has grown for 11 consecutive quarters through the first quarter of 2012, and expectations broadly are for continued growth.

In fact, U.S. GDP is bigger today than at its prerecession peak. And because the housing sector has been weak and the rest of the economy on balance has expanded, housing has shrunk as a percentage of the overall U.S. economy.

According to the Bureau of Economic Analysis, it’s now just 2.3% of U.S. GDP (as of March 31, 2012). Which means, however weak or strong, the housing market has less power to move the economy than before the downturn, not more.

For stocks too, housing’s weakness likely lacks the power to stymie the ongoing equity bull market. Typically, it’s the unforeseen or underappreciated, material fundamental developments that matter most for stock market direction over the next 12 to 24 months. But because housing has been weak for some time, it has least material surprise power (i.e., are there many investors who aren’t aware housing has been weak?).

What’s more, perhaps not all is so bleak in the housing market. After some short-term sales spikes tied to tax incentives starting midyear 2009, home sales seemed to have reached a bottom in June 2010. (See Exhibit 1.) Since then, sales have continued a general upward trend. In April, existing-home sales logged a strong 3.4% month-over-month increase (10.0% year over year), and average prices rebounded — up 8.4% month over month (15.9% year over year). (See Exhibit 2.)

Looking forward, data increasingly suggest the possibility of continuing improvement in residential real estate fundamentals. Existing-homes for sale, both supply and months of supply, continue to trend downward. Mortgage rates remain extremely low, and supply levels are normalizing as a declining share of foreclosed properties is supporting prices.

Moving forward, although there are increasing signs of an improving housing market, we don’t anticipate a sharp rebound. However in our view, housing lacks material power to hamper the ongoing economic expansion or stymie the equity bull market.

This article constitutes the views, opinions, analyses and commentary of Fisher Investments as of May 2012 and should not be regarded as personal investment advice. No assurances are made Fisher Investments will continue to hold these views, which may change at any time without notice. In addition, no assurances are made regarding the accuracy of any forecast made herein. Past performance is no guarantee of future results. A risk of loss is involved with investments in stock markets.


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