Slow Housing Market Affects Economic Growth
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RAY SUAREZ: Now, the slumping housing market and its impact on the economy. The latest numbers found housing construction dropping more than expected throughout much of the country, and applications for building permits — a sign of future construction — fell to the lowest levels since 1997. The NewsHour’s economics correspondent, Paul Solman, has been exploring what the changing fortunes of the housing market may mean for economic growth. Here’s his report.
PAUL SOLMAN, NewsHour Economics Correspondent: The economy’s good: unemployment, low; stock market, up. The economy’s bad: consumer confidence, shaky; auto industry, stalled; and most importantly, perhaps, housing is on the skids.
Home sales are down some 14 percent from last year. New housing starts, down almost 30 percent, knocking more than a full percentage point off economic growth. And there’s great fear these days that the hottest housing markets of recent years, like California and New York, will fall hardest.
So are we OK or in the early stages of a housing-led crash that might depress us all? We took this debate to one of America’s real estate hot spots, New York City, and a trendy neighborhood known as Tribeca, home to a construction boom of dizzying proportions and economic forecaster Nouriel Roubini, a gloom-and-doomster who sees evidence all around him of a real estate bubble about to burst, starting with his own duplex loft, for which he paid $800,000 four years ago. An identical apartment just went for $2 million.
NOURIEL ROUBINI, New York University: Here is my building. There is another one that is just being finished right there. There will be 500 new units. Now, another site right across the street is going to be a 40-story-high residential building. If you look here, in Tribeca alone, I have a map that shows you all the new developments that are coming up in the next year-and-a-half. You see…
PAUL SOLMAN: This is the black?
NOURIEL ROUBINI: Yes, these are all the blacks. If you count them between northern and southern Tribeca, there are about 80 new residential developments. That’s the glut.
PAUL SOLMAN: A glut, says Roubini, that will drive down prices, housing values, and construction activity, leading to a general recession. But that’s a bit extreme, says economic forecaster Ed Yardeni, a longtime Wall Street bull whom we’d asked to join us, listen to Nouriel Roubini, and respond.
ED YARDENI, Chief Investment Strategist, Oak Associates: Look, it’s very possible that we’ll have a recession; you never want to rule that out. Housing is in a recession for sure, and the jury’s definitely out right now on whether that spills over into the rest of the economy. I don’t think it will.
Consumer spending is very strong because we’re creating lots of jobs. Real incomes are very strong, all-time record high, and business is still spending.
Affects of the housing 'glut'
PAUL SOLMAN: Nouriel Roubini, by contrast, thinks the housing recession will force America's homeowners to cut their spending drastically.
NOURIEL ROUBINI: Prices have already fallen almost 10 percent for new homes. As the prices fall, the wealth is reduced, and people that have been for the last year consuming more than their income, the savings rate for the household has been negative, how can they do it? Essentially by using their homes as their ATM machine. They were borrowing against their home equity.
PAUL SOLMAN: Home equity loans are an example of what economists like Karl Case call the "wealth effect." The more wealth you have in your home, the more you spend.
KARL CASE, Wellesley College: The total value of the housing stock in the United States is actually close to $25 trillion today. And just five years ago, it was only about $14 trillion. So there's been an enormous increase; it's a very big number.
PAUL SOLMAN: Some of that increase is new construction, but existing homes have risen about $5 trillion in value. And research shows that homeowner spending rises by roughly 4 percent of the increased value of their homes. Four percent of $5 trillion? That would mean $200 billion of extra spending in the last five years alone. A case in point: Professor Case himself.
KARL CASE: I bought my house for $392,000. I now own it outright. It's worth over $1 million, or at least it was over $1 million. And I behave differently, there's no question about that.
PAUL SOLMAN: He spends more. But oddly enough, says Professor Case, people don't seem to spend much less when their house loses value.
KARL CASE: It has an effect on the way up. It stimulates spending clearly on the way up, but the data suggests it doesn't materialize very much on the way down.
PAUL SOLMAN: On the other hand, the data have never shown a rise and potential fall like the current one. Case's longtime collaborator, Yale economist Robert Shiller, has charted existing home sales, adjusted for inflation, since World War II. Pretty steady for half a century, through boom and bust, but starting in 1997, they soared.
So why doesn't that suggest that, if it goes down this time around, it could be a disaster?
KARL CASE: Well, if it goes down by as much as it's gone up, that is a disaster.
PAUL SOLMAN: Meanwhile, back on the sidewalks of New York, Ed Yardeni was skeptical.
ED YARDENI: I don't think Americans are stupid. People aren't just buying things that they can't afford. Maybe a few are, but for the most part Americans are doing extremely well. And the reality is they're not making any more land in places that wealthy people, or wealthier people, want to live.
NOURIEL ROUBINI: You look all around here, there's been an excess supply, and things are actually slowing down severely...
ED YARDENI: So what's the worst-case scenario, that instead of your place being worth $2 million, it's only going to be worth $1.5 million and you bought it for $800,000? You're still ahead.
NOURIEL ROUBINI: Well, many people have no equity in their homes. They essentially they had zero down payment, and now prices are falling, so they have negative equity. There will be lots of delinquencies, a lot of foreclosures...
PAUL SOLMAN: As is already happening in places less trendy than New York. Journalist Alyssa Katz is just back from Ohio.
ALYSSA KATZ, Journalist: Ohio's foreclosure rate has gone up, I think it's about ten-fold in the last decade. It's just an extraordinary epidemic throughout the state.
PAUL SOLMAN: Like New York, the housing sector was booming in Ohio.
ALYSSA KATZ: So many people borrowing more than they could actually afford and investing and speculating in real estate, hoping to make money, that there is just a glut of property then for sale on the market that simply couldn't get sold, went into foreclosure because people could not make the payments.
PAUL SOLMAN: And Ohio may be a harbinger, says Katz, of crashes elsewhere.
ALYSSA KATZ: In Atlanta, in Dallas, in Denver, Miami, and a number of cities, we're seeing a number of homeowners who are falling behind on their payments, who simply cannot keep up with their mortgages, are a month or two or more behind. What we haven't seen yet is foreclosures on any large scale.
PAUL SOLMAN: Nor have we seen large-scale foreclosures in the arguably overheated New York market. In fact, even on the New Jersey side of the river, there's still a boom rivaling Tribeca's.
But there are plenty of jobs?
CONSTRUCTION WORKER: Today. Tomorrow might be a different story. You don't know.
PAUL SOLMAN: And that gives Nouriel Roubini another reason to worry about tomorrow and a housing crash leading to recession: the income effect, fewer jobs as the real estate market dries up.
NOURIEL ROUBINI: Housing directly and indirectly has contributed to almost one-third of all employment growth in the United States since 2000. So when the housing jobs are going to fall, there's going to be spillover effect to all the other housing-related activities, job losses among mortgage brokers and real estate agents, and the mortgage finance industry, home appliances, furniture, retail in general. As you build less suburban homes, there are going to be less shopping centers, so there will be many negative effects.
PAUL SOLMAN: Is he right?
ED YARDENI: I don't think so. As a matter of fact, if you just still look down this street, there's Wall Street, and Wall Street is absolutely booming. Up the street, you've got the advertising industry. You've got internet companies.
PAUL SOLMAN: You've got luxury condos going up within yards of Ground Zero. It could be a glut, as Roubini fears -- a bubble near bursting -- or it could be a sign that the U.S. economy is pretty darn resilient.
ED YARDENI: This economy is extremely dynamic. We're creating lots of jobs. I mean, yes, we've lost 20,000 jobs so far this year in residential construction; we've gained 120,000 jobs in non-residential construction.
PAUL SOLMAN: A fact not lost on workers in Hoboken, New Jersey.
CONSTRUCTION WORKER: There's highway work. There's different facets of work that don't always go on at the same time. So sometimes the road work would pick up the slack if the housing market and private money is not there.
Counting on the dynamic economy
PAUL SOLMAN: As we ferried back from Hoboken, neither Yardeni nor Roubini was changing his tune.
Do either of you worry that, when you look at the latest headlines, you're seeking confirmation of your own hypotheses here, you know, the biases that you already bring to the picture?
NOURIEL ROUBINI: We have our own views, and there is an element of that, but you have to look at the numbers. If the numbers suggest further slowdown, then that's what the numbers say.
ED YARDENI: But at the end of the day, one of us is going to be right, and one of us is going to be wrong. Nouriel is putting a lot of stress on housing. I'm putting a lot of stress on the strength in employment, the vitality of the economy, the fact that people are prospering, the global economy is doing extremely well. So it's a difference in emphasis, I think.
PAUL SOLMAN: A difference of emphasis quite typical of economists, as it happens. Some, like Nouriel Roubini, look at construction projects like those still going up in major metropolitan areas and see buildings half-empty. Others, like Ed Yardeni, see them by contrast as half-full.