An inconvenient housing sector

WASHINGTON Sun Dec 19, 2010 3:01pm EST

One of 21 protesters and homeowners facing foreclosure despite making payments under the Home Affordable Modification Program (HAMP) is arrested for trespassing during a protest outside the offices of Chase Bank in Los Angeles, California, December 16, 2010. REUTERS/David McNew

One of 21 protesters and homeowners facing foreclosure despite making payments under the Home Affordable Modification Program (HAMP) is arrested for trespassing during a protest outside the offices of Chase Bank in Los Angeles, California, December 16, 2010.

Credit: Reuters/David McNew

WASHINGTON (Reuters) - Wall Street banks have been gripped by a certain euphoria in recent weeks, with their economists touting a modest improvement in U.S. data as an omen of more robust growth to come in 2011.

Housing figures next week may inject a dose of sobriety into these forecasts. Anticipation of a strong expansion, coupled with worries about the budget deficit following a new tax deal in Washington, have pushed Treasury bond yields that directly affect mortgage rates sharply higher.

This raises the concern that a still-struggling housing sector, the epicenter of the country's worst financial crisis in generations, may yet see further deterioration.

With Europe still reeling from a debt crisis that just will not go away, another bump on the road for the U.S. economy might deprive the global recovery of not one but two key engines.

A report on Wednesday is expected to show existing U.S. home sales, which account for the bulk of the market, rose by about 300,000 units on an annualized basis to 4.71 million in November. That would mark a move further away from the 15-year low seen in the summer, but it would still be a far cry from record peaks over 7 million in 2005.

"We're still in an economy that isn't in a normal recovery mode," said Edward Leamer, director of Anderson Forecast at the University of California, Los Angeles. "Unless we get housing and construction jobs back, we will not get a robust recovery. We will be stuck with high unemployment rates indefinitely."

That view contrasts with the burst of optimism prevailing in financial markets over the last month. Some economists, encouraged by what they see as the stimulative effects of a fiscal agreement between President Barack Obama and Republican lawmakers, are looking for U.S. gross domestic product to expand more than 4 percent next year.

For others, however, a battered housing market and bleak job prospects are a major risk to the recovery.

"The U.S. economy is showing some sparks of life in late 2010," said Ken Goldstein, an economist at The Conference Board, an industry-backed research group. "The indicators point to a mild pickup after a slow winter. Looking further out, possible clouds on the medium-term horizon include weakness in housing and employment."

A Reuters poll of more than 70 economists suggests U.S. GDP will rise 2.7 percent in 2011, up sharply from 2.3 percent in a November poll but still too low a level to make much headway in reducing the nation's 9.8 percent jobless rate.

EUROPE'S MORASS

Looming in the backdrop is a European debt debacle that seems to get more convoluted by the week.

Just two days after Ireland's parliament approved an $85 billion rescue from the European Union and the International Monetary Fund, the IMF warned the country still faces big risks that could affect its ability to repay the loan. Moody's, the ratings agency, slashed Dublin's credit grade and European banks warned of future losses on Irish assets.

Investors' concern about the credit-worthiness of highly indebted euro zone countries will make it hard for some states to finance hefty debt repayments in the first half of 2011, even as new issuance in the bloc falls.

Euro zone countries are expected to borrow less in the bond markets in 2011 than they did this year, but the interest rates investors are demanding pose a burden that may become unsustainable for the likes of Spain and Portugal.

Unlike in the spring, when Europe's problems disrupted interbank lending and dented U.S. growth, such effects have not been felt in the latest, more drawn-out round of debt negotiations. But analysts say the threat remains very real.

(Reporting by Pedro Nicolaci da Costa; Editing by Dan Grebler)

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Comments (6)
doctorjay317 wrote:
The Fed can print as much paper money as they want and Wall Street demons can make something out of nothing (they are called derivatives).

But when it comes to tangibles like building houses, there is no magic formula. Wall Street gets free money from Uncle Sam, but who’s looking after the rest of the promised land?

Dec 19, 2010 8:55pm EST  --  Report as abuse
Jonesy wrote:
I’m amazed at how this is still news. What do your eyes tell you? Every block in America there is a Home Depot juxtaposed to a Lowes, next to a Mattress Firm. There are katrillions of condos, California mansions, lofts, and townhomes built during the Bush/Grahmn era. All with no one to buy them. Then there is the “gently used” home market, where everyone already lives because they couldn’t afford a townhome “from the low 350’s”. The first thing we should’ve done when the housing bubble appeared was burn down the excess. get ready for “strategic defaults” galore; as more people act like Trump’s and Goldman Sachs and veiw homeownership as a business.

Dec 20, 2010 2:38pm EST  --  Report as abuse
IntoTheTardis wrote:
I see the evidence for a moribund housing market every time I drive through my neighborhood. I can count four houses for sale in less than a quarter of a mile (I haven’t done a complete count further back into my subdivision). And these houses have been on the market for many months. The odd thing is that ours is not a part of the country plagued by foreclosures. Three of these houses are owned by people who had to move for various reasons. One was owned by an elderly man who died eight months ago. They can’t sell their homes because no one is buying. Make no mistake, this is a tremendous drag on the economy.

Hey, here’s a thought. You think the superrich oligarchs who just got a tax break will spread the wealth around and buy up these homes? You know, as a patriotic gesture. Love of country and all.

Dec 20, 2010 3:41pm EST  --  Report as abuse
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