RealEstateEconomyWatch.com

Both the economy and the housing markets have displayed concrete signs of improvement during the past several months. After experiencing a 5.4 percent and 6.4 percent contraction in GDP in the fourth quarter of last year and the first quarter of this year, the economy has shown extraordinary signs of rebounding. GDP fell by only 1 percent in the second quarter and is likely to have expanded by 2 to 3 percent in the third quarter.

There are a number of reasons why the economic rebound has begun. A portion of the $787 billion economic stimulus package (about 33%) has already been executed via direct spending and/or tax reductions and has given consumers and businesses a slight lift. Further, the rest of the world is beginning to show signs of economic life. Europe’s economy seems to be rebounding at the right time; countries, like France and Germany, expanded for the first time in over a year in the second quarter. U.S. net exports are now making a positive contribution to GDP growth.

The U.S. credit crisis is also making progress, going from devastating to harsh. Spreads like the 3 month Treasury/LIBOR spread are returning to normal levels. Corporate debt issuance was up markedly during the first two quarters and is likely to continue those improvements in the second half of this year. The credit wheels have been greased a bit, helping the financial markets rebound from what was thought to be a dire situation. However, there is still a long way to go before the credit markets return to pre-crisis conditions. There is still little activity in the asset-backed securities markets and lenders are still adhering to ultra-conservative underwriting guidelines. But a little progress goes a long way.

Consumer spending is has begun to advance. Retail sales have increased in three out of the past four months. The latest month, August, experienced the largest monthly increase of the year; a 2.7 percent rise. Similarly, the business side of the economy is picking up. Industrial production rose 0.8 percent in August following a 1 percent increase in July. Glancing at the detailed tables, manufacturing activity is becoming more widespread even with an anticipating drop in auto sales. On the negative side, job losses continue to mount on a monthly basis, albeit, at a decelerating pace. We expect job losses to continue into 2010 because the labor market usually lags as the economy rebounds. Companies usually wait until they are comfortable with economic conditions before they begin to hire again.

And finally, the economy is getting sorely needed help from the housing sector. After several years of contraction, single family residential investment is likely to have grown in the third quarter. Federal Reserve accommodation via its multi-billion dollar mortgage-backed security purchase program has kept mortgage rates hovering near historic lows, providing low cost financing incentives for households to purchase homes. In addition, the government’s first-time homebuyer tax credit program which is about to expire at the end of November proved to be effective, by enticing first-time buyers to utilize the $8,000 tax credit to acquire a home.

As a consequence, home sales have trended up and home inventories have trended down over the past several months. Further, home price depreciation has slowed on a year over year basis and prices have increased on a quarterly basis. The housing sector appears to be gaining its own momentum. Unfortunately, continued job losses and a steady dose of foreclosures due to rate resets on option ARM and interest only loans promise to temper the housing recovery in the near future.