U.S. House Prices and 2009 Growth Prospects

December 30, 2008

The range of U.S. growth forecasts in 2009 is about twice as wide as the one-percentage point band one typically finds at the start of a calendar year. Housing, a root cause of the recession, remains a main source of uncertainty over how much longer the downturn will last and how deep it will be. Wide agreement can be found in the view that recovery is unlikely to begin in a sustainable way until house prices stabilize. Such prices peaked shortly before mid-2006 and, according to the Case-Shiller-20 index reported earlier today, had dropped 23.7% by December. Some analysts think prices will fall only about 10% further, more or less. Others are much more pessimistic in projecting an additional drop of at least 30%. If the adjustment lies between 10% and 30% — and I suspect it will be around the middle of that range — the correction should take at least another twelve months to complete. In order for a recovery to start by 3Q09 as many analysts presume, requires the business cycle to lead, not follow, the housing market. Perhaps one way that might happen is for fiscal and monetary stimulus to over-ride deflationary forces. The tax rebates last spring did that from a GDP growth standpoint, but other aspects of the U.S. economy fit a recessionary profile sufficiently that the National Bureau of Economic Research, which decides when recessions begin and end, concluded that a downturn had indeed started way back in December 2007. In like fashion, it is possible that some aspects of the U.S. economy will respond to macroeconomic stimulus in 2009, but I doubt the economy as a whole will not be declared to have returned to an expansionary business cycle before 2010. A significant remaining housing market correction and a lack of strength in other countries should prove the optimists wrong. I hope I’m wrong, and one early indicator to watch will be share prices. Such bottomed in mid-August 1982 when the last recession comparable to the present one was still seemingly deeply entrenched, and that turnaround foreshadowed an economic upturn by the end of that year, which very few people had been predicting four months earlier.



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