Can Economic Stimulus Save The Housing Market?

Been getting a few requests about our opinion on the various proposes economic stimulus packages in the works - including sharply reduced short term rates, and some kind of tax relief. How will they impact the housing market? Are we seeing any psychological impact already?

First things first: Are we in recession already? Is a recession inevitable?

From where we sit, the current-recession answer is, No, it doesn't appear so. Slowdown, yes. But exports are strong with the weak dollar, and there other signs of okay-ness out there. Gonna be hard to avoid one before the end of the year though.

Here's my favorite way to look at recession probability. The folks at ECRI publish a weekly leading economic indicator (WLI). In several decades they've not missed a recession call and have had no false-positives. This data is good.

Weekly Leading Indicators. Recession Watch from ECRI

What's this chart tell us? This data leads the economy by 6-9 months. ECRI looks for the Three P's of drop in its economic statistics before it calls a recession. Pronounced (check), persistent (check), pervasive (allllmost).

We're in the danger zone here, which is why immediate monetary (interest rates) and fiscal (taxes, etc) stimulus might just work.

Where does the housing market fall into all this?

We know that the real estate market is generally lousy. But really, really low mortgage rates mean that you can lock in affordability, if you have the credit. From Bloomberg:

The yield curve as of January 27 2008. Low rates are good. source: Bloomberg. [whose New York offices I visited last week, incidentally. Very cool. Googlesque. Maybe nicer.]

For a long time, our worst case scenario here at Altos has been recession plus high interest rates. We've avoided that so far. As a result the pain in the housing market is most pronounced at the margins: Overstretched, with weak credit. New home construction. Here's what I mean.

Seattle, Kirkland, and Redmond home prices as of January 25, 2008. Not the persistent weakness at the low-end of the market. This scenario is similar to what we're seeing in most economically strong parts of the country.

So the weakness, while felt across the spectrum, is most acutely painful at the low-end of the market. That implies that a deep recession with it's job loss and income uncertainty is what it'll take to knock the final leg of the stool out from under the the rest of the market.

Conclusion: stimulate away, Uncle Sam, and do it quick.