Economic Recovery Still Depends On Housing, Says Wells Fargo Economist

Mark Vitner is firmly in the camp of economists who can’t envision a turnaround in America’s economy without a sustained rebound within its housing industry.

“Until housing recovers, the economy will have a hard time growing beyond 2%,” said Vitner, a senior economist with Wells Fargo Securities, who offered his economic overview last Friday during a webinar presented by The Shinn Group, the Colorado-based consulting firm.

What’s holding that back, in Vitner’s estimation, is “the weakest employment recovery we’ve ever seen.” Wells Fargo foresees the unemployment rate hovering above 9% for at least the next two years. Vitner said businesses aren’t hiring for a lot of reasons: weak consumer demand, as well as employers’ fears about the “uncertainty” of rising fixed costs, such as healthcare and other benefits, which have “racheted up” even as wages and salaries “remain restrained.” Vitner also saw government regulation has being overly “hostile” to business. “It’s a mindset that has to change,” he said.

That being said, Wells Fargo projects housing starts will rise in each of the next two years (see chart), and hit 1.5 million by 2016 or 2017. Vitner explained that economic conditions simply haven’t stopped pent-up demand for housing. “The population is growing by 2.7 million [annually] and by one million households,” he said. Vitner also doesn't buy into what he called “Generation Rent,” where younger Americans are supposedly spurning homeownership altogether. Consequently, builders should be motivated to meet this demand with new construction because “there’s very little new inventory out there.”

But builders should also be aware that some of this demand will invariably be held at bay because “a lot of people’s credit has been impaired,” said Vitner, so it remains to be seen just how quickly buyer prospects will jump back into the housing market.

Vitner's predictions at times sounded contradictory. On one hand, he thinks the chances are only one in three that the U.S. economy will fall back into recession. On the other hand, he doesn't think the annual growth rate for the gross domestic product will rise above 1.7% over the next two years. “When GDP growth dips below 2%, we have fallen into recession every time, without exception,” he stated.

Vitner blamed this seeming inconsistency on a “fog on the highway” that’s shrouding the outcomes of many issues, including credit availability, the deleveraging of household debt, fiscal and monetary policies, the European debt crisis, the collapse of Greece’s economy, and the slowdown in China’s economy.

More specifically, it’s hard to predict when the foreclosure mess will abate. What Vitner would like to see happen is the signing of a “master settlement” between states' attorneys general and the mortgage services they’ve sued, which would terminate future litigation and create a fund to buy down mortgages.

To keep more homeowners from falling into foreclosure (forced or voluntary), Vitner proposed that banks offer to shift the negative equity on underwater mortgages into a second mortgage with a 1% interest rate over 30 years. “It’s not a perfect solution, and it wouldn’t be for everyone,” Vitner conceded. But he thought this might make it more economically feasible for some homeowners to purchase a new house. At least one builder listening in on the webinar was skeptical. “A typical solution by a banker,” was his response to Vitner’s suggestion.

John Caulfield is senior editor for Builder magazine.