More Bullish Signs for Housing

As the U.S. recovery churns into its second year, more bullish arguments for housing are beginning to emerge.

Talk and writings about real estate has finally shifted lately. It looks as if our contrarian view of the housing market is finally beginning to gain traction.

For instance, Credit Suisse analysts say the worst is behind us and that fear of another hit on the housing market is just an overreaction. The bank experts point to U.S. government support of 70% of home mortgages that will likely keep prices from the drops seen in 2007 and 2008. Last week Brett Arends of the Wall Street Journal listed 10 reasons to buy a home. He strongly counters the recent Time Magazine cover story that questions the pros of homeownership. But perhaps the strongest voice comes from Bill Wheaton of Massachusetts Institute of Technology's Center for Real Estate. Wheaton believes the housing market is poised to make a strong comeback. His research points to "a sleeping giant that is about to wake up."

Wheaton modelling shows that much of the excess home inventory will either be sold, occupied or otherwise absorbed by 2013. Furthermore from 2011 onward, buying demand will return to pre-recession levels. Even more encouraging is that he shows that the recovery of home construction could boost overall GDP to levels unseen during recoveries after other previous recessions -- the the exception being that of the massive building that happened right after World War II.

His paper illustrates that, "housing construction will not only rise, but it will stay high for a while, which didn't happen in previous recoveries." Wheaton continues, "It won't just be a one or two year blip."

The heart of the Wheaton argument lies in the rate of residential construction today. It's been historically low – so low that demand is now actually significantly overtaking the level of building going on. This demand-side factor alone sets the stage for a relatively large comeback in residential rebound.

As we've noted here on several occasions, housing drew us into the large slump and it is likely that housing will provide significant bounce to lead us out on the positive side.

Housing construction could hugely drive America's economic growth over the next few years, Wheaton says. Residential investment as a share of GDP is relatively small, averaging about 3% to 4%. But given that there's so little building going on today, it's plausible housing construction could add an average of 0.7% to GDP growth per year over five years – a level far greater than what has been seen during recoveries of previous downturns.

Of course many see Wheaton (and others listed above) as way too bullish given what the majority of "experts" are saying about the housing rut.

But remember when it comes to economics, the majority is always wrong.

September Ushers In Welcome News; Manufacturing Growth Accelerates and Adds Jobs for Ninth Straight Month

The beginning of September saw good news flowing in many corners of the economy.

The consumer made a comeback in July-in both income and spending. Personal income in July posted a 0.2 percent gain, following no change in June. The July figure was a little lower than the consensus expectation for a 0.3 percent rise. More importantly, the wages & salaries component rebounded 0.3 percent after slipping 0.1 percent in June. This component would have been even stronger had it not been for a dip in government payrolls from laying off temporary Census workers. Private industry wages and salaries gained 0.5 percent in July, following a 0.1 percent dip in June. The consumer sector bounce-back should help support overall economic growth.

And retail sales followed the consumer. Chain-store sales improved in the August 28 week, according to Redbook's tally which shows a plus 3.0 percent year-on-year pace vs. a plus 2.6 percent pace in the prior week. The positive trend is very steady, showing a four-week average of 2.8 percent over the past two weeks and 2.9 percent over the five prior weeks.

ISM's manufacturing report on business reported a PMI that came in at a stronger-than-expected 56.3 for a sizable eight tenths gain from July. The reading is well over 50 to signal month-to-month growth and in the comparison with July, and points to growth at an accelerating rate. Further this growth is in business activity like production, employment, and inventories. These three factors all accelerated in August. The ISM report is solid and includes strength in both exports and imports and an increase in prices paid that reflects demand for inputs. Jobs in manufacturing have now grown for 9 straight months and last month reflects hiring that is accelerating.

Initial jobless claims are now edging down, as they have for the past couple of weeks. Initial claims for the August 28 week came in at 472,000 compared with a revised 478,000 in the prior week and the 2010 peak of 504,000 the week before that. The four-week average fell 2,500 to 485,500.

And the overall private sector is providing jobs again... that sector added 67,000 positions after a 70,000 boost in July. Leading the way was a 45,000 boost in education & health services, with health care up 40,000. Professional & business services returned to positive territory, rising 20,000 after dipping 3,000 in July.