DON’T BET THE FARM

Weak job growth will knock a recovery off course

The U.S. Federal Reserve may have a tight grip on what rising interest rates could do to derail the housing recovery, but slowing job growth and other threats to consumers will still knock the residential property market off course. Home prices have staged a healthy rebound since falling more than

from peak to trough — as measured by the Cash-Shiller Home Price Index — during the recession. However, the pricing swing exaggerates the extent of the improvement given that prices overshot to the downside during the worst of the housing bust. Since Federal Open Market Committee members have repeatedly stated the central bank’s purchase of mortgage-backed securities has provided a greater lift to the economy than its treasury buying, it is unlikely to wind up these stimulus efforts too soon. Therefore, a gradual increase in mortgage rates shouldn’t derail the housing market. But weak job growth can.

“Job security fears have risen and the new health-care law has raised some questions about what’s going to happen with income growth in the next year,” says Mark Vitner, senior economist at Wells Fargo. “I think potential homebuyers are being hit with a lot of doubts all at once — doubts about how strong the economy is and how strong their personal financial position is.”

He also believes the housing market is transitioning from a rebound driven primarily by speculation to one where underlying fundamentals are much more important. In a recent report, Vitner noted that investor purchases were the primary driver of the recovery in the past few years, which helped clear inventories of foreclosed and lender-owned properties, and pushed prices dramatically higher. Similarly, builders have taken on a speculative role by purchasing deeply discounted lots.

As a result, the housing recovery appears to be at a key turning point, with Vitner highlighting data that shows far fewer foreclosure bargains and cheap lots, as well as a focus on leasing rental properties rather than acquiring more inventory. “The housing recovery will now depend more on that most elusive element — homeowners,” the economist says. “Put simply, we need more of them.” —