Housing markets

IN THIS morning's edition of his "Wonkbook" newsletter, Ezra Klein directed readers to news pieces about the developing proposal for a foreclosure settlement with America's big banks. Mr Klein added:

For all that the economy is improving, housing remains a huge drag, with legitimate estimates suggesting we've still got as many as 11 million foreclosures in the pipeline. "The number one reason for nervousness about the economy in the next six to nine months is the foreclosure crisis," Moody's economist Mark Zandi told me last week.

That strikes me as way off the mark. Austerity? Sure. Monetary tightening? No question. European crisis? Oil prices? Real issues. But housing? No, not really.

That isn't to say that things in housing markets are lovely. Prices may fall a bit more nationally. Inventory remains high nationally, and very high in some markets. Lending standards are still tight and could stay that way for some time. There are 11m households with negative equity in their homes (but NOT, as Mr Klein's memo suggests, 11m likely foreclosures). Conditions aren't pretty.

But here's why housing isn't the threat Mark Zandi suggests it is: none of the above comes as any surprise. The residential investment contribution to GDP has been awful since the beginning of 2006. It simply can't get much worse. In the third quarter of last year, residential investment came in at a $329.8 billion annual rate. It hasn't been that low in nominal terms since the first quarter of 1996. For housing to threaten recovery, residential investment would need to fall substantially from that level. And that's very, very hard to imagine. Indeed, it's basically impossible to imagine such an outcome unless some other, more pressing threat sends the American economy back into deep recession. And in that case, the thing to watch out for isn't housing, it's the more pressing threat.

Similarly, we could imagine falling housing prices impacting household consumption when home values were high and home equity lines of credit were expanding rapidly. But households long ago began reducing consumption to pay off existing home equity loans. It's hard to see what would make this process accelerate substantially. And finally, one could imagine a financial market channel, but here, too, it's difficult to be too pessimistic. American banks are in far better shape than they were in 2008 and far more of the country's bad loans have been acknowledged. It's far more likely that causation would run from crisis elsewhere, to financial market pain, to housing collapse than from housing to finance to the real economy.

This is my general view: that if housing markets go suddenly south it will be the result of, rather than the cause of, some other economic calamity.

In a very important way, the fact that housing is no longer a dire threat to the economy is bad news for the subset of America that remains in the grip of severe housing pain. A few charts at Calculated Risk illustrate the problem. About one in four households with a mortgage are underwater, which sounds bad. But the overwhelming majority of underwater debt is held by the 12% of mortgage holders who are more than 25% underwater. And negative equity (and especially serious negative equity) is highly concentrated in just a few states, namely, Nevada, Arizona, Florida, Michigan, and California.

The housing collapse will continue to mean serious problems for the finances of impacted households, which will include wrenching foreclosures and bankruptcies. It will mean neighbourhood deterioration and other problems for places where foreclosure activity is highest. But because this is no longer a national problem, these concerns will fall off the map. Legislators in Washington have zero interest in helping the underwater homeowners of Nevada, which will earn them Tea Party ire in their home states without much helping their local economies.