First, the good news. Mark Zandi, chief economist for Moody’s Economy.com, believes the Great Recession will end this year.
If that’s true, that will surely be welcomed by just about everyone. During this difficult economic period, more than 8 million jobs have been lost. Housing starts have dropped to an annualized level of 500,000 units, down from more than 2 million in 2005. Banks large and small have failed.
“This recession has been the longest, most severe and the broadest-based than any recession since the Great Depression, hence the moniker ‘The Great Recession,’” said Zandi in a teleconference yesterday on “The State of the Coming Recovery.” But such economic turmoil should end sometime in 2009, he said, thanks to adjustments in consumer spending, the stabilization of the U.S. banking system, and the expected benefits of the federal stimulus package.
In contrast to 2006, for example, when Americans actually had a negative savings rate, “all income groups are now saving something,” Zandi said. Second, banks and investors are loosening their grips on some capital, although not where builders are concerned. (There’s also little market for residential mortgage securities, acknowledged Zandi. “Credit flows remain very poor,” he said.) Finally, the positive effects of the stimulus should soon be felt by communities as the government releases millions upon millions of dollars for weatherization, transportation, and more.
Now the bad news for builders. “Housing will not be an early source of growth in this recovery,” said Zandi. “That’s very different from past recoveries,” when housing has typically been a leading indicator of economic growth.
But as the economy regains its footing this year and next, Zandi said growth will happen—and quickly. In 2010’s fourth quarter, for example, he forecasts housing starts to return to an annualized pace of 1 million units, and a 1.6-million-unit annualized level in 2011’s fourth quarter. “Once we work through the impediments to demand, I do think we’ll see substantial pickup in economic activity in 2011 and 2012,” he said.
Still, housing represents a major risk to Zandi’s view that the recession—generally defined as two consecutive quarters of decline in real gross domestic product (GDP)—is nearly finished. If home prices continue to fall and foreclosures continue to rise, the recession will linger. “This is the one I am most worried about,” said Zandi, who is concerned that the Obama foreclosure mitigation efforts will not be successful—or successful enough. “I am increasingly worried that these impediments [to refinancing and modifying mortgages] cannot be overcome.” (The economist did not address these obstacles or what the solutions might be during the teleconference.)
That would seem to bode ill for places such as California, where housing’s boom has turned into a foreclosure bust. But Zandi, who developed a reputation as a housing bear earlier this decade, sounded more upbeat than one might expect about the Golden State, where the state has begun issuing IOUs. “California will probably turn with the rest of the United States,” he said. “The housing problems there were much less severe than in Florida, and Californians have been conditioned to believe that if they buy housing at low prices, they will be rewarded over a 10-year period. … They are more willing and able to get into the housing market.”
Zandi also had positive words for Texas, which has been a major market for builders large and small. “Texas will recover more quickly,” he said. “It doesn’t have the serious housing overhang that California and Florida have, and energy will be a source of growth for the state.”
Floridians, on contrast, should brace themselves for a long, slow walk back to economic health. “Florida will be one of the last states to get out of the recession,” Zandi predicted. It has a serious oversupply of housing, both single-family and condos, particularly in South Florida. “Migration flows have dried up. It’s very reliant on travel and tourism, which will remain impaired [economically].”
Alison Rice is senior editor, online, at BUILDER magazine.