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The Ship Is Turning
By: Dr. Charles Lieberman
Date: 4/27/2009
The housing market is bottoming, as is the economy. Inventories of unsold homes are declining at a rapid pace, so it won't be much longer before construction activity must pick up. The same process is also setting us up for a bottom in manufacturing, where inventories are declining at a precipitous pace that will soon lead to a healthy pop in production. Growth should resume by the third quarter, although possibly as soon as the second quarter.
It is the depletion of inventories most everywhere that seems to be setting the stage for a turnaround in the economy. First quarter GDP, to be reported this week, will show another sizeable decline of more than 4%. But it is the composition of this decline that offers so much promise. Inventory liquidation occurred at one of the fastest rates on record, as consumer spending increased, final sales declined more slowly, and production fell sharply. Production cannot remain so far below the pace of sales for long. This sets the stage for an economic rebound.
Housing inventories are also falling to levels that will shortly require a rise in new construction. It is conventional wisdom that the housing market will not bottom until 2010 at the earliest, while pessimistic forecasts point to 2011 or even later. We see the housing outlook more positively. Conditions are falling in place for a bottom in housing within months, possibly even in the second quarter. Unsold newly constructed inventories fell to 311,000 units in March, a historically low level, despite the growth in population and record levels of affordability. Buyers remain cautious about buying, because prices have been falling, so it has paid to wait. But as housing scarcities become more common in more markets, bidding wars have already erupted in several markets over the past few months, as reported by the Wall Street Journal last week--many people waiting on the sidelines will be forced to bid or risk missing the bottom in prices and their housing choices. In fact, recent reports suggest housing sales and construction outlays are stabilizing, even as inventories are still declining rapidly. Thus, we expect housing to swing from being a drag on growth to being a contributor very soon.
Improvement in the credit markets is a crucial element to any prospect for recovery. As the asset-backed securities markets improve, credit will become more available to enable consumers to pick up spending, particularly for autos and other durables. Fortunately, credit spreads are falling and the asset backed securities market has improved. The stage for recovery appears set.
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