Thursday, May 23, 2013

Friday: Durable Goods (and a comment on housing driving the recovery)

by Bill McBride on 5/23/2013 08:32:00 PM

Several people have asked me about this article at CNBC by Jeff Cox: Why Housing Won't Drive the Recovery

Despite data points that in some cases are at multiyear highs, Robert Shiller, Karl Case and David Blitzer believe there are multiple headwinds that will keep a lid on housing gains.

Among the obstacles are a low level of new housing starts, an unexpectedly slow migration of so-called shadow inventory onto the market, and continued difficulty for buyers to secure financing.

"You've got a lot of breathless commentary in the media," said Shiller, a Yale University economist. "All this talk that we're in this great recovery—we probably are in the short run, the longer run doesn't look so terrific to me."
First, housing (technically residential investment) will be a key driver for the economy. Period. 

It is important to understand that "residential investment" is mostly new homes and home improvement. For existing home sales, only the broker's commission is included in residential investment (nothing is added to the housing stock).  Those looking at the level of existing home sales are looking at the wrong number, as are those focused only on house prices.

Look at "headwinds" that are mentioned in the article:
1) "a low level of new housing starts".  That is a headwind?  To me, the low level of starts means there is more upside based on demographics.  The homeownership rate peaks for those in the 55 to 75 age group, so the boomers will not negatively impact homeownership for a decade or more.

2) "an unexpectedly slow migration of so-called shadow inventory onto the market".  Do they expect the pace of foreclosures to increase?  I don't.  The process is very long in most judicial states, and I don't expect another wave of foreclosures hitting the market - but I do think we will see distressed sales for years.

3) "continued difficulty for buyers to secure financing".  OK, but this has been a headwind for the last couple of years.  Looking forward, I expect some loosening in lending standards.  So this is really a potential tailwind.

Nothing in this article changes my view.

Friday economic release:
• At 8:30 AM ET, Durable Goods Orders for April from the Census Bureau. The consensus is for a 1.1% increase in durable goods orders.

Note: The bond market will close early Friday at 2PM ET. The stock market will close at the normal time. All markets are closed on Monday in observance of Memorial Day.

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