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Four Reasons Housing Recovery Isn’t Yet Boosting Economy
Nick Timiraos / The Wall Street Journal / May 22, 2013
The housing market may finally be leaning on the economy’s gas pedal—but it’s also keeping a foot on the brake.
Those expecting a quick return to the “virtuous cycle” by which rising prices, home sales, and housing construction feeds further consumer spending will have to wait until Americans feel more comfortable borrowing and until banks feel more comfortable extending credit, according to new commentary published by analysts Joshua Anderson, Emmanuel S. Sharef, and Grover Burthey at Pacific Investment Management Co., or Pimco, a unit of Allianz SE.
The Pimco strategists outline four primary blockages that could restrain the housing sector’s ability to play the traditional role boosting the economy during a recovery.
First, construction is coming back, but the industry’s muscles have atrophied a bit. It could take a while for the housing-construction industries to rebuild lost muscle mass. While builders started construction on 780,000 units last year, an increase of 28% from the year before, construction still needs to double to keep up with population and household growth.
How quickly it gets there matters, and the speed with which construction grows could depend on its ability to overcome a series of capacity constraints. The housing crash “disrupted the process of entitlement and permitting of vacant land, while the construction labor pool shrank as unemployed workers left the labor force, re-trained into other industries or emigrated,” the Pimco report says. “The construction labor force is now smaller than it has been at any time since 2000, and it is unclear whether large pools of skilled labor can be easily tapped to build 1.5 million units.”
Second, banks have to be willing to expand credit beyond today’s conservative standards. New regulations will keep lenders cautious. Ironically, rising rates could help, because that will dry up the gravy train of refinances that have kept mortgage lenders well fed over the past two years. With less refinance business, banks will have greater incentives to compete for business, easing up their standards.