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U.S. housing bulls aren’t getting any help from the facts

Former Federal Reserve chairman Ben Bernanke expressed confidence the other day that the U.S. economy is firmly on the road to recovery from the Great Recession of 2008-09, thanks in part to the fact many of the headwinds that flattened U.S. housing are finally dissipating.

Well, those winds are still plenty strong, if the latest U.S. readings are any indication. Sales of new homes nosedived 14.5 per cent in March from the previous month. What's more troubling is that the numbers were down in all regions from the previous year, despite decent demand and only a small increase in supply, which is boosting prices.

The culprits for this unusual state of affairs include continued tight credit conditions for developers and consumers alike, rising mortgage rates and steep increases in construction costs, which are outpacing price hikes on the houses themselves.

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This optimism-dousing news follows a report Tuesday from the U.S. National Association of Realtors that sales of existing homes also slid slightly in March to their lowest total since July, 2012, when the Fed was propping up the mortgage market with aggressive quantitative easing.

Miserable winter conditions get a lot of the blame for just about every aspect of recent poor performance in the U.S. and Canadian economies, and U.S. housing is no exception. After all, who wants to brave a blizzard just to do some serious house-hunting or trek to a bank or law office to sign a few documents? But lousy weather can't explain why sales of existing homes fell in seven of the preceding eight months, and included regions where the weather was not a major factor.

These are the sorts of problems a relatively healthy market can eventually sort through. But they cast considerable doubt on the ability of the critical housing sector to take a leading role in any sort of broader U.S. economic recovery in the months ahead.

As for Mr. Bernanke, this would not be the first time he has misread the housing market. Back in 2006, about two weeks into his first term at the Fed's helm, he declared that "house prices will probably continue to rise, but not at the pace that they had been rising. So we expect the housing market to cool, but not to change very sharply."

A year later, he was saying that the "weakness in housing market activity and the slower appreciation of house prices do not seem to have spilled over to any significant extent to other sectors of the economy."

By February, 2008, it was impossible to ignore the massive spillover. Still, you can't keep a housing bull penned up for long: "By later this year, housing will stop being such a big drag directly on GDP," he asserted.

His Fed successor, Janet Yellen, has been a bit more circumspect about the state of housing. After observing that the recovery was blunted by rising mortgage rates last year, she warned earlier this month that housing "still has far to go." But she added that "it seems to have turned a corner."

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The evidence shows that the critical corner may remain elusive for somewhat longer than policy makers had previously envisioned.

Follow Brian Milner on Twitter at @BMilnerGlobe.

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About the Author
Senior Economics Writer and Global Markets Columnist

Brian Milner is a senior economics writer and global markets columnist. In a long career at The Globe and Mail, he has covered diverse business beats, including international trade, the automotive industry, media, debt markets, banking and the business side of sports. More


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