Can The Economy Withstand Another Housing Breakdown? [PulteGroup, Inc., Lennar Corporation, D.R. Horton, Inc.]

real estateSy Harding: With the three fascinations of the week, the Fed’s FOMC statement, the separation vote in Scotland, and the Alibaba IPO, now history, will investors re-focus on the economy?

Given what the Fed actually said in its statement, and some recent economic reports, it might be a good idea.

Investors were anxious to judge how long the Fed will leave interest rates at low levels by whether or not it left the words “for a considerable time” in its FOMC statement.

They might be better counseled to focus on the fact that the Fed emphasized again that the timing will depend entirely on the economy, specifically mentioning its concern of “significant underutilization of labor resources” [a euphemism for unemployed workers], and that “the housing sector remains slow”. In fact, the San Francisco Fed said, “The public might not give enough weight to how dependent the Fed’s guidance is on incoming economic data.”

That said, as we all know, the two major driving forces of the economy, in both directions, are the housing and auto industries. Their products are the largest purchases most consumers make in their lifetimes. They also have the longest tails as far as driving sales, manufacturing, and services in numerous other sectors of the economy

Their problems led the way down into the Great Recession. They then led the way out, thanks to massive automaker and bank bailouts, and incentives to auto and home buyers.

The problem is that while auto sales continued to recover almost all the way back to pre-recession levels, the housing recovery stalled more than a year ago.

 

When the weakness continued into the winter months, analysts explained it as a temporary weather-related pause that would result in a big ‘pent-up demand’ spike back up in the spring.

That did not happen, nor did the subsequent assurances work out that the spike back was merely delayed during the summer for one reason or another.

And now the outlook is worsening further, evidence mounting that housing is not only stalled, but potentially in the throes of another breakdown.

It’s not just that home sales are down from a year ago. It’s reports, like that of Thursday, that ‘new home starts’ plunged 14.4% in August, and permits for future starts fell 5.6%.

New home starts are even more important than home sales, particularly existing home sales. It is homes under construction that produce jobs and drive sales of construction materials, furniture, appliances, and services.

There has been evidence for some time that the slowdown is not a temporary situation.

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