All eyes were on the jobs report last week and it was better than anticipated. The unemployment rate, which analysts expected to inch up a bit, actually declined from 8.9 percent to 8.8 percent, a two-year low, as employers added 216,000 jobs for the month.
Although government payrolls fell, reflecting efforts to close the yawning budget gaps in many states, the private sector more than made up for the loss, adding 230,000 workers to the 240,000 hired in February – the largest consecutive gains in five years.
“The speed of the decline in the unemployment rate already is putting pessimists to shame,” Robert Brusca, chief economist at FAO Economics, told MarketWatch.
The labor market report was the latest in a string of positives that have been piling up for several months, providing growing evidence of a sustainable recovery. “Whether it’s jobs, income, spending, just about everything in the economy [in February looked pretty decent,]” Stuart Hoffman, chief economist at PNC Financial Services Group Inc. in Pittsburgh, told Bloomberg News And he made that comment before the extremely positive employment report.
Firmer Footing
Manufacturing activity increased at its fastest pace in almost seven years in March; the Index of Leading Economic Indicators, retail sales, spending, consumer spending and household wealth also rose, leading the Federal Reserve to pronounce the economy now on “firmer footing.”
But many economists are concluding that the bottom line for the economy is less than the sum of these statistical parts. Their primary concerns: The rising cost of food and fuel are likely to curb consumer spending going forward and the housing market remains a dead weight on the economy and a drag on the national economic mood.
“The problem of delinquent mortgages and falling home values is the most stubborn, entrenched and damaging economic problem our country faces today,” Brian Moynihan, chief executive officer of Bank of America, said in a recent speech to economists.
Recent statistics support that gloomy assessment. Sales of existing homes, which now represent 95 percent of the market, fell by 9.6 percent in March, beating the most pessimistic forecasts and ending three months of positive reports from the National Association of Realtors (NAR). Pending sales increased, but the anemic 2.1 percent gain wasn’t nearly enough to offset the sales decline.
If You Can’t Say Something Nice…
Determined to find something positive to say, the NAR’s chief economist, Lawrence Yun, insisted that the pending sales figure has “trended up very nicely since bottoming out last June, even with periodic monthly declines.” Contracting activity, he noted, is 20 percent below the low point reached after the federal home buyer tax credit expired last year. But the index also remains discouragingly more than 8 percent below a year-ago reading that was far from healthy.
If the existing home sales pulse is weak, the new home sales heart beat is barely detectable. Sales of new homes declined “unexpectedly” in February according to press reports. It’s not clear who expected sales to increase – or why – but the 17 percent decline produced an annual sales rate of 250,000 units, the slowest pace on record. Starts and permits followed the same trend. Single-family starts plunged by 11.8 percent to an annual rate of 375,000 ¾ the second weakest showing since 1949 ¾ while permits sank to an annualized rate of 382,000, their lowest level ever
“This was an awful report, perhaps the worst housing starts report ever,” Patrick Newport, U.S. economist at HIS Global Insight, said in a news release.
Brian Jones, an economist at Societe Generale, agreed, describing the housing reports as “abysmal. You could say that part of it was attributable to unusually harsh weather,” he suggested.
Negative Fundamentals
Alternatively, you could be realistic and acknowledge that housing continues to be plagued by negative fundamentals that show no near-term signs of improving in significant ways. Tight credit, still high unemployment (notwithstanding the improvement in that sector) and uncertainty about where the housing market is in this cycle – close to the bottom or still far from finding it – are making it impossible for many would-be buyers to enter the market and keeping those who could make that move on the sidelines.
Add to that list of troublesome negatives foreclosures, which continue to cast a giant shadow over the market. Foreclosure activity plummeted in February as lenders and servicers remained locked in a struggle with state law enforcement officials over how to resolve allegations of foreclosure abuses and how to restructure foreclosure procedures. The dam holding back those stalled foreclosures will break eventually, spewing nearly 2 million more unsold homes into the market, according to some estimates.
“The foreclosure overhang is oppressing the industry,” according to Ken Mayland, president of ClearView Economics, who predicts “another sad year” for housing.
The NAR’s Yun isn’t that glum, but he did acknowledge in a recent press conference, “One cannot say that we are in a recovery right now. If the price decline persists, even with job recovery,” he noted, “it could hamper some buying enthusiasm.”
Still Falling
That’s putting it very mildly. Home prices, which have been trending unnervingly downward for several months, posted their sixth consecutive decline in January. The S&P/Case-Shiller index of prices in 20 cities fell by 3.1 percent ¾ the largest year-over-year decline since December of 2009. The current reading is not much above the low point reached two years ago in the depths of the recession.
“The numbers are gloomy, no question,” economist Karl Case, co-founder of the index, told the New York Times. “We’re bouncing along a rocky bottom.” And that, he said, represents a relatively optimistic view, compared with the double-dip housing downturn some economists are now predicting. “Others think we’re falling off another cliff,” Case noted.
Yale economist Robert Shiller, who co-founded the housing price index with Case, is among them. He sees “a substantial risk” that prices will fall by another 20 percent or more this year.
Analysts at MacroMarkets echoed that view, warning in their most recent research report that prices nationally are just 1 percent away from “a new post-crash low.” Half the economists responding to a recent survey agreed that a sustainable housing recovery won’t begin until 2013 at the earliest and may not take hold until 2015.
Divergent Views
That pessimism is widespread, but not universal. The April 11 cover of Fortune Magazine announced “the return of real estate. Finally,” the tag line said, “after years of plummeting home prices, the market is showing signs of a turnaround.”
The fundamentals that predicted the housing bust a few years ago – the cost of owning vs. renting and the level of new construction – are now pointing definitive toward a recovery, according to Fortune’s analysis. “So let’s state it simply and forcibly,” Shawn Tully, the author asserted. “Housing is back.”
But the article also noted the divergence of opinion about where the housing market is and where it’s heading, noting, among other examples, the contrasting views of index collaborators Case and Shiller.
Case himself has seemed to be of two minds on the question. Quoted in the Fortune article, he agreed with the author that “the lack of new home building is a huge help that a lot of people are ignoring. People think I’m crazy to be optimistic,” he said, “but housing is looking like the little engine that could.”
His comments in the New York Times article were decidedly less upbeat, however. While he agreed that the spring market “could have some good surprises,” he also admitted, “I say that with absolutely no conviction.”
