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Housing may no longer be in the basement, but it is barely crawling up the cellar steps.
December saw housing starts slip a greater-than-expected 4.3% to an annual rate of 529,000. Over the past two years, starts have been averaging below a 600,000 pace–well below the mark of nearly 2 million hit regularly during the housing boom.
The collapse in housing–along with the attendant mortgage crisis–was the main trigger for the U.S. recession. Residential construction has subtracted from gross domestic product growth for 12 of the last 14 quarters.
The federal government tried to help by instituting two homebuyer tax-credit programs. Those lifted sales temporarily. In addition, the Federal Reserve has been buying up mortgages in an effort to keep interest rates ultra-cheap. That worked for a while but the 30-year mortgage rate is about half a percentage point higher than it was in October.
With no new federal help expected, housing now must sink or swim on its own. The outlook will depend greatly on better job and wage growth. Stronger labor markets would allow more families to afford a home and to boost household formation as young adults find jobs and go out on their own.
Any improvement this year will be small. Homebuilders are in a deep hole. New construction is competing with cheaper, foreclosed homes, some of which are not very old.
Millions of homeowners are defaulting on their loans because of unemployment or mortgage adjustments that made the monthly payment unaffordable. An unknown number is choosing to walk away from a mortgage worth more than the house is.
Foreclosure tracking firm RealtyTrac said last week that foreclosure filings–default notices, scheduled auctions and bank repossessions–were issued for a record 2.87 million U.S. properties in 2010. RealtyTrac said the number would have been even higher if not for the lull in activity after questions were raised about the legitimacy of bank-foreclosure documents.
These foreclosures, along with short sales and people needing to move, have created a huge overhang of already-built homes available for sale.
No wonder new construction has fallen like a rock, and why builders are in a sour mood. The National Association of Home Builders reported Tuesday that its housing market index–a gauge of builder sentiment–remains at a low reading of 16 this month. During the boom, the index stood in the 60s and 70s.
Moreover, don’t read too much good news into the 16.7% jump in permits. The Census Bureau said the increase may reflect builders taking out permits before new building codes took effect in California, Pennsylvania and New York in January 2011. If that’s the case, expect permits to plunge this month.
The 2011 U.S. economy has much going for it: a rising stock market, fiscal stimulus, and businesses finally investing in new equipment. But housing won’t bring much to the party.
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Real Time Economics offers exclusive news, analysis and commentary on the economy, Federal Reserve policy and economics. The Wall Street Journal’s Phil Izzo and Sudeep Reddy are the lead writers, with contributions from other Journal reporters and editors. Send news items, comments and questions to realtimeeconomics@wsj.com.
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