The Deal: Housing is Not an Economic Fix

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NEW YORK (TheStreet) - Further gains in the housing sector will be tougher to come by as the free kick of low interest rates is withdrawn and the sector bounce from the burst property bubble subsides.

That's the warning from economists and asset allocators, who view housing market confidence as a key factor underpinning CEO confidence and dealmaking appetite.

Barclays economists said Tuesday, July 23, that the housing market would not be a game changer for the U.S. economy this year, noting the hit from fiscal tightening and tax increases, with sequestration expected to drag on the sector for the rest of 2013.

"Housing will not lift GDP to 3% to 4% with 10% to 15% growth in the sector having a smaller effect on the economy after the credit crisis--we would need 20% to 30% growth for that," the bank's chief U.S. economist Dean Maki told journalists on a call. Instead, Maki forecasts 2.5% GDP for the year ahead, even if housing growth continued to be robust. Barclays senior U.S. economist and asset allocation strategist Michael Gapen said the "easy gains" had been had in housing, with an improvement in fundamentals such as employment needed to boost further gains.

Goldman Sachs strategists have warned of a slowdown for house price growth, noting that national property prices are no longer undervalued. Existing home sales fell 1.2% in June though prices were up 13.5% from a year ago, according to the National Association of Realtors, with distressed sales accounting for 15% of sales--the lowest since October 2008.

Goldman strategist Charles Himmelberg said rising mortgage rates would pressure house price appreciation, telling clients this month, "Although mortgage interest rates are low by historical standards, the speed of the recent increase is among the highest in history: the 106 bps increase in mortgage rates over the past two months is similar to the 1994 experience."

The short-term shock occasioned by rapidly rising rates could slow growth, he said, but housing was unlikely to suffer a sharp slowdown given other economic factors indicative of a recovery on solid footing.