The Forecast: Economic Pickup in the Second Half

Economist's Commentary: March 6, 2008

The Forecast: Economic Pickup in the Second Half
By Lawrence Yun, NAR Chief Economist

Economic growth in the first half of the year will be essentially non-existent. By the second half, the economy will expand at a rate slightly higher than 2 percent. The 2008 fiscal stimulus package contains over $100 billion in tax rebates and checks should be in the mailbox by early summer. This tax cut is more than twice as high as a similar rebate passed in 2001. Past research suggests that the marginal propensity to spend from a tax rebate to be about 40 cents to 50 cents on the dollar. That translates into additional consumer spending of $60 to $80 billion in the second half of the year. This stimulus is the key factor to help move the economy in the second half of the year.

This tax rebate is needed to compensate for outrageously high oil prices and from falling housing values and stock market values. 104 dollars for oil is a major drag to consumer spending. Europeans are not paying as much because of stronger currency. The higher oil price, which is priced in U.S. dollars, is partly driven by the very weak dollar. The weaker dollar is caused in part by a higher inflation rate in the U.S. vis-à-vis the rest of the advanced economies. If a currency is losing its purchasing power, why hold that currency?

If you recall, oil prices were under $20 per barrel just 10 years ago. When the price of oil rises, it is essentially a tax placed on consumers with less money available to spend on more enjoyable items and activities. This "oil tax" unfortunately does not even go to the U.S. Treasury. Rather it is filling the coffers of governments of the likes of Russia, Venezuela, Saudi Arabia, Nigeria, and Iran. It is a transfer of money from a democratic county to a non-democratic country. (Though the Supreme Court decision in the 2000 election and current super-delegate controversy and non-electoral votes of Michigan and Florida do not make the U.S. a pure beacon of democracy, it is still far superior to those oil-driven rigged elections.)

The housing market will also get some relief. A higher loan limit - up to $729,000 from $417,000 - in several local areas, including Los Angeles, Orange, and San Francisco counties, will have a big impact in bringing out the buyers. Second half home sales will no doubt be much stronger than first half as a result. Existing home sales will rise to a 5.7 million unit pace in the second half versus 4.9 million in the first half. Rising sales will also bring down inventory and help strengthen home prices, generally speaking. The national median price will fall in the first half and then rise in the second half. For the year as a whole, it will have fallen by 1% - after having fallen 1.4% last year. As is always the case, there will be tremendous local market variations. The Northeast region is likely to be first region to show signs of stabilizing and then strengthening housing market conditions, while the West region will likely trail behind.

The West region could, nonetheless, surprise on the upside. What is unique about the current housing cycle is the pace of price declines in some local markets, thereby significantly improving affordability conditions in a short time. Home prices are falling at or near double-digit pace in California, Nevada, and Arizona. A sudden quick home price adjustment may be just the thing to quickly induce buyers back into the marketplace. After all, as with many parts of the country, jobs have been created in those Western states over the past two years of housing market slump, and hence, there exists significant pent-up demand.

New home sales will take much longer to turn around. That is simply due to the fact that there are far fewer new homes being built. Single-family housing starts have fallen by more than 50 percent in the past two years. Based on housing permits - generally a reliable indicator of upcoming housing starts - new home construction will further fall for the remainder of the year. New home inventory has been trending down but more cutbacks are needed. Therefore, homebuilders need to further bite the bullet and hold back construction.

Loan modifications and other foreclosure mitigation programs are all well intended and good, but the best policy assistance in the current market condition is to unleash the pent-up demand. Any measures that violate the sanctity of a private contract such as permitting judges to reset interest rates should be avoided as that will greatly harm home sales by raising the cost of borrowing on new loan originations. There is some discussion of a possible tax credit for first-time homebuyers. Such a policy will be a great stabilizer of the housing market and the economy. My estimate on the cost of about $20 billion is fairly reasonable. A presidential candidate who makes this tax credit as a showcase of his/her economic policy will also be the next president of the United States.



This is one in a series of commentaries by the Research staff of the National Association of REALTORS®.