The Federal Reserve is doing its bit, too, said Cutts. Under the Fed’s QE3 policy, the central bank is buying $40 billion in mortgage-backed securities a month—about as much as Freddie Mac produces. “They’re buying one-third of the market every month,” she said.
“The Fed said we’re not going to get out of this until housing is fixed…There’s a long list of people who benefit when somebody buys a house,” Cutts added.
And those people—contractors, laborers, decorators, appliance salespeople—have been missing in action in the housing depression. The ripple effect has been profound.
Residential fixed investment usually accounts for around 5% of GDP each year. By the bubble year of 2005, it hit 6.1%, before plunging to 2.5% in 2011. That’s a huge gap: This time we did without the usual comeback in housing, which traditionally leads recoveries. Or as someone once said, the housing cycle is the business cycle.
According to economist David Malpass, “housing has often contributed a half to a full percentage point to GDP growth after deep slumps.” And for each percentage point increase in GDP, roughly a million jobs are created. You do the math.
A 2010 study of OECD countries from 1970 to the mid-1990s showed housing slumps last on average around 4.5 years and prices fall by 20%. Booms last five years and prices rise 40% on average.
This time, said Humphries, the housing market peaked in April 2007 and troughed late last year—a 4 1/2-year-long slump. Prices fell around 40% when adjusted for inflation. So, this decline was longer and much deeper than average.
Does that mean the recovery will be stronger and last longer? Who knows? But investors already are anticipating a good rebound.
As of early this week, the Dow Jones US Home Construction index has soared 80% this year, vastly outperforming the Standard & Poor’s 500 index. Homebuilders like DR Horton (DHI) are reporting big increases in revenues and profits.
And on Tuesday, Home Depot’s (HD) earnings beat Wall Street expectations, and the company raised guidance for the rest of 2012. The stock, which did nothing for years, has been up over 50% this year, and trades at its highest price in a decade.
As a contrarian, that gives me pause. These stocks have clearly gotten ahead of themselves, discounting a couple of years of housing recovery. They’re ripe for a pullback, and all the anxieties about Europe, the “fiscal cliff,” and higher taxes have gave investors a good excuse for some year-end profit-taking.
And indeed, we may see continued turbulence in the weeks—even months—ahead. But if the economists are right and this housing recovery is for real, that will be a buying opportunity not only for housing stocks, but for the market as a whole.
Howard R. Gold is editor at large for MoneyShow.com and a columnist for MarketWatch. Follow him on Twitter @howardrgold and catch his political commentary on www.independentagenda.com.