The widely held notion that housing is a lagging indicator remains entrenched as most forecasters interpret this cycle as if it were simply a larger version of similar periods from the past.Yet, housing was clearly not a lagging force at the outset of the Great Recession, it was the primary driving force… the leading force… the charade that showed itself to be a fools game sending participants either running for the hills or off to receivership, bankruptcy or foreclosure.
No one will argue that housing became the centerpiece and primary focus of the risky financial innovation and speculation that drove many of the world’s largest economic systems to the brink in 2008 but since then the consensus has generally reverted to the traditional interpretation of housing providing only a lagging view into the health of the macro-economy.
What changed?
We had the suspension of “mark-to-market” that effectively rigged the system as well as the Feds unprecedented support of the mortgage market and Washington’s various tax schemes to encourage home buying… but what really changed to make housing a lagging indicator again?
I submit that nothing really changed… the efforts on the part of the Fed, FASB and Washington simply forestalled the natural clearing process and the recognition of losses but housing is still fundamentally entrenched in an epic unwind.
This unwind is not simply backward looking function of an ailing economy, it’s still a driving force weighing down the economy.
While many forecasters will argue that “residential investment”, the category of housing related activity that either adds or subtracts from GDP, has been so decimated that its impact on our economic performance is now nominal, I hold this notion to be naive.
We are a consumption-driven economy and there are not many things more capable of driving down consumer spirits than realizing a significant loss of wealth.
The home value decline has been and will be for some time a potent destroyer of consumer optimism and as such it is a leading force for thrift, lower living standards and economic weakness.
The Fed may continue to employ various incarnations of “quantitative easing” to drive up stock prices in an attempt boost consumer moods but such trickery cannot be a replacement for lasting and stable home prices.
Consider this… over 23% of all mortgaged American households are currently underwater and home prices in most of the country are still on the decline with many markets continuing to set new lows… this is a particularly fragile state of affairs as eventually we will have another recession… stocks will plummet, unemployment will spike and confidence will erode.
Will our economy be able to withstand the shock as another wave of households fall prey to over indebtedness?
Does the notion of housing continuing to drag 11 million American households into insolvency sound like a lagging effect?
