Economy Watch: Is the Housing Market Faltering or Just a Little Slow?

Although the economy as a whole is finally getting stronger, housing is looking softer.

The latest few S&P Case-Shiller Home Price Indexes point to an odd phenomenon: even though the economy as a whole is finally getting stronger, housing is looking softer. In his monthly statement about the latest numbers, released on Monday, S&P Dow Jones Indices chairman David Blitzer put it this way: “The housing recovery is faltering. While prices and sales of existing homes are close to normal, construction and new home sales remain weak. Before the current business cycle, any time housing starts were at their current level of about one million at annual rates, the economy was in a recession.”

“Faltering” might be putting the matter too strongly, since the year-over-year change for home prices has actually stabilized (according to the Case-Shiller’s own national numbers) at 4.6 percent, where it’s been for a few months now. That’s a lot less than in 2013, but annual price increases that high — more than 10 percent during some of that year — are the sort of unsustainable levels associated with the mid-2000s. The bubble, in other words, and no one wants that again.

Still, housing does seem a little weak, with Case-Shiller being one of a number of metrics of that. Or perhaps more accurately, the housing recovery hasn’t been particularly robust. During the recovery from previous recessions, that hasn’t been the case, with strong (but not bubble-like) increases in home prices following economic slowdowns. The weakness of the current recovery is a matter of competing expanations. One possibility is that the overall economic recovery has been too sluggish until recently to sustain higher home prices, along with higher rates of sales and development. Another idea (favored by Realtors) is that lending standards are still too tight. Also, there’s the matter of generational psychology. According to that line of thought, many Millennials are still too shocked by their harsh recessionary experience to want to buy property.

The fate of residential real estate is closely linked to parts of the commercial side of the business, including retail and warehouse/distribution. Retail in particular relies heavily on household formation, as well as the “wealth effect” among homeowners whose properties are increasing in value. People spend more when they’re actually are richer, or simply perceive themselves to be richer—such as when their home value increases (one estimate puts the increase at a 6 cent increase annually for every dollar of additional home equity).