Housing Is Recovering. So What?
NEW YORK (TheStreet) -- The housing market should continue to recover, but it is unlikely to be a significant contributor to economic growth from here on, according to economists at Barclays.
Residential investment has added to the gross domestic product or GDP for eight consecutive quarters, but it is not enough to be a game-changer for the U.S. economy.
"Housing is a contributor, it supports the economy but it is unlikely to lift us into the 3% to 4% range," for GDP growth, economists Dean Maki and Michael Gaspen said in a media conference call hosted on Tuesday morning.
The economists noted that residential investment now accounts for only 2.5% of GDP compared to 6.3% before the housing bubble burst in 2008. Therefore, robust improvements in residential investment do not have the same effect on the economy they once did.
Secondly, the so-called wealth effect from housing is not all that significant, adding about two-tenths of a percentage point to consumer spending. In fact, financial wealth is more significant, adding as much as a percentage point.
The economists forecast annualized GDP growth of 1.5% for the second quarter, which should pick up to 2% in the third and fourth quarter. In 2014, they expect the economy at an annualized rate of 2.5% through each of the four quarters.
Their expectations for home prices are much more optimistic, with prices projected to rise 9% to 10% this year and 7% to 8% next year. Homebuilders are likely to construct 1.1 million homes in 2013, and 1.4 million in 2014.
Still, "the easy lifting in the housing sector is done," the economists said. Housing had over-corrected so much that it had to rebound. "The trend from here will be dependent on macro fundamentals."
Right now, the economists believe home prices will continue to increase despite the 100 basis point increase in interest rates for 30-year conventional, fixed-rate mortgage loans, since housing remains "broadly affordable."
Plus, "lean inventories will support housing starts and home price appreciation," they said.
Barclays believes that homebuilders will continue to keep inventories tight as they are wary of overbuilding, given current economic conditions.