As dire as it is, the housing slump is not as big a factor for the economy as investors think. True, the downturn has been unprecedented...
As dire as it is, the housing slump is not as big a factor for the economy as investors think.
True, the downturn has been unprecedented, leading to foreclosures, seizures in the credit markets, erosion of household wealth, record-low consumer confidence and, until recently, stock-market declines.
But residential construction contributed just 3.8 percent to first-quarter gross domestic product, which measures the nation’s output of all goods and services.
The sector’s contribution to the economy has been declining since the first quarter of 2006, notes Paul Lally, an economist with the Bureau of Economic Analysis.
Most Read Business Stories
- Seattle among top markets as U.S. home prices increase by double-digit percentages for the first time in years
- Another top Amazon executive to leave company
- Boeing 757 bound for Seattle makes emergency landing
- Alaska Airlines ordered to pay $3.2M to family of woman who died after escalator fall
- Fry's Electronics executive accused of embezzling $65 million
By contrast, consumer spending hit a high of 70.8 percent of GDP in the first quarter of 2008, based on advance numbers. Exports, another rising category, added 12.7 percent.
“Do not freak out about housing,” says JPMorgan Funds Management Chief Market Strategist David Kelly. “We pay too much attention to housing in terms of how it’s going to direct the U.S. economy.”
Kelly thinks stocks are underpriced as a result.
Housing is closely tracked, with frequent updates on sales, construction activity and prices. “The problem is, every one of those numbers is lousy, and every one makes the evening news,” notes Kelly.
Citi Investment Research strategist Tobias M. Levkovich says consumer spending is more important for stock prices. “Too many critical points are missed when investors only hear one data point and don’t analyze the rest of the information,” he writes.
Of course, housing shouldn’t be dismissed. Mortgage troubles helped cause the credit crisis.
Christopher Burdick, director of economic analysis for the Schwab Center for Financial Research, notes the spillover effects on spending. “The concern is warranted,” he says.
But Kelly thinks investors should pay more attention to the stronger-than-expected growth in services in April. In addition, an early reading on first-quarter GDP points to growth, albeit at a sluggish 0.6 percent pace.