Nothing boosts recovery like an energized housing market. The home building industry likes to brag - if bragging is the right term - that a downturn in home building may lead you into a recession but its recovery will pull you right out. It creates jobs, encourages spending and stabilizes home prices - all of which have a direct effect on local and state revenues.
The good news is that there are signs that a housing recovery is on its way. Pending home sales rose in October, the eighth consecutive month of gain - the longest streak since measurement began in 2001. The Pending Home Sales Index (PHSI), which is issued by the National Association of Realtors the first week of each month, is considered a leading indicator of housing activity and is based on signed real estate contracts for existing single-family homes. Some of the juice in the rising index undoubtedly comes from the federal government's first-time homebuyer tax credit, which was due to expire this month. Congress, however, voted this week to renew and expand it to existing homeowners.
The other bright(ish) light: Home prices in the 20 largest U.S. metro areas are declining more slowly. Compared to September 2008, home prices in September 2009 were down by only 8.1 percent - the first non-double-digit year-over-year decline this year. Prices are roughly back to where they were in the fall of 2003, before the bubble began, according to the S&P/Case-Shiller Home Price Indices.
Offsetting those relatively positive numbers: New single-family home sales went down in September by 7.8 percent compared to September 2008, and by 3.6 percent from August. Housing starts are down around levels that date back to World War II.
Another stat that's not brimming with good news: foreclosures. According to RealtyTrac, an online marketplace of foreclosure properties, one in every 136 U.S. housing units received a foreclosure filing during the third quarter of this year - the highest quarterly foreclosure rate since RealtyTrac began issuing its report in 2005. California, Florida, Arizona, Nevada, Illinois and Michigan accounted for 62 percent of the total foreclosure activity in the third quarter.
The federal government is putting some helping hands out there. There's the homebuyer tax credit renewal, which should generate an additional 180,000 home sales in the coming year, according to the National Association of Home Builders. And from the U.S. Treasury, there's a new bond purchase program to support new lending by state housing finance agencies and a temporary credit and liquidity program to improve the access of HFAs to liquidity for their outstanding bonds. That should help states and localities provide mortgage money for willing - and able - homebuyers.
To get a handle on how the housing market is affecting state and local fiscal policies, I talked to Nicolas Retsinas, who runs Harvard's Joint Center for Housing Studies and who, earlier in his career, headed up Rhode Island's housing finance agency. Here's an edited version of our conversation.
How harsh has the housing downturn been for state and local economies?
Let me count the ways. The housing downturn is a euphemistic term for the foreclosure calamity that is devastating our cities. But it's broader than that. City and state revenue models have long depended on growth to help fill their coffers - some places more so than others. Many counted on escalating growth. We now know that growth is not everlasting, that what goes up comes down. We are feeling the brunt of that, particularly communities that saw a building boom, such as in the Southwest, southern Florida and southern California. They were riding the carousel of this continuing increase in property valuations - as more property is developed, cities get more revenue from them. We're not seeing that anymore. Rather, we're seeing a cessation of building. So, there is not only no new growth, but cities are losing their base because of foreclosure.
Do you see housing recovering?
Mixed signals are better than all-bad signals. The word I use about the housing recovery is "fragile." In large measure it is very dependent on artificial life support. Federal government assistance is undergirding the housing market - and not just because of its role in FannieMae and FreddieMac. The FHA (the Federal Housing Administration) has grown from 2 percent of housing-market share a few years ago to 25 percent today. One has to wonder whether that's sustainable.
There are positive signs, though - the uptick in pre-existing home sales and in some cities, stabilizing of housing prices.
Since housing is so local, what housing statistics should state and locals be watching to see if things are getting better for them?
Look at foreclosures. To the extent you have a large number of foreclosures, it means someone is anxious to unload properties and will accept low prices, and that's contagious to other prices. It makes it difficult for homebuilders to construct new homes to compete. So, as long as we continue to see a large number of foreclosures, it's difficult to say the housing market is stable.
Is there anything a state or locality can do to boost its local housing market?
There's clearly an opportunity to take advantage of new federal resources. But it's not abundantly clear that there is one way to get out of this. Being a spectator doesn't work. You have to be engaged. At a minimum, start with a good inventory of what the problem is and monitor and track what's going on. A lot of homes are being foreclosed by a handful of lenders. Interact with those lenders. Know who key players are.
Cities and states are, of course, going through downturns themselves and laying off people. So, just at a time when they need capacity to engage, their capacity is shrinking.
What role can housing finance agencies play?
The agencies have been stymied because they are reliant on credit markets and those credit markets have been frozen or shot. The new announcement by Treasury will open up the door to re-engagement. The agencies will be able to issue bonds for first time homebuyers. But there's no magic wand. It's a difficult time with many, many problems.
Can a housing recovery pull a city or state out of this recession?
It's hard to imagine that the rebound of the housing sector can proceed at a pace to carry on its back the entire economic recovery. Housing is part and parcel of recovery, but it's not the only engine.
The best economic news was on every newspaper's front page and home page, and led every TV news program: The economy expanded by 3.5 percent in the third quarter - the first increase since the second quarter of 2008 - and retail sales revived in October. Here are some less-followed indicators that we may be in the midst of an upturn in our fiscal fortunes:
After six consecutive quarters in retreat, businesses in the third quarter increased spending on new computers and software at an annual rate of 1.1 percent. The first quarter's annualized plunge, by way of contrast, was 36.4 percent.
For the six months ended in September, the Conference Board's index of leading indicators rose 5.7 percent - the fastest pace since 1983.
Despite the disheartening growth in unemployment to 10.2 percent, ISM's Employment Index registered 53.1 percent in October, 6.9 percentage points higher than in September. This was the first month of growth in manufacturing employment in more than a year.
In a survey of health care organizations released in October, 38 percent reported that their organization will increase hiring in the next six months.
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