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Originally published Saturday, July 27, 2013 at 8:05 PM

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Housing is looking up, but from a deep hole

Don’t look for housing to return to the commanding position it held in the economy 10 years ago.

Special to The Seattle Times

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Our long national housing nightmare is over.

Last week the government said sales of new houses in June reached their highest level since May 2008. The seasonally adjusted figure of 497,000 sales nationwide was up 38 percent from the same period last year and powered ahead despite higher mortgage rates.

Sales of previously owned houses declined a bit nationally in June but were still up 15 percent from a year ago.

The Standard & Poor’s/Case-Shiller 20-city index posted its largest ever gain in prices for existing houses in April. The number of underwater mortgages, where the owner owes more than the house is worth, is down. Even shares of the big production housebuilders have recovered since 2010.

“Housing has contributed significantly to recent gains in economic activity,” one prominent economist said, noting that sales, prices and construction had all increased over the past year. “Rising housing construction and home sales are adding to job growth, and substantial increases in home prices are bolstering household finances and consumer spending while reducing the number of homeowners with underwater mortgages.”

This view carries weight, considering the economist quoted is Ben Bernanke, Federal Reserve chairman, testifying before the House Financial Services Committee.

This is also the view from 30,000 feet. It is not wrong, but it doesn’t spot the misery many homeowners still face, or the devastation wrought on those who lost their houses.

It is also a look back, not necessarily forward. Housing was historically a leading indicator. It’s not certain that remains true.

One reason: We have come through the first recession since the end of World War II that was a direct result of a housing bubble and the financial collapse closely associated with it.

Other recessions were caused by the Federal Reserve fighting inflation, oil shocks, the dot-com bust, a savings-and-loan scandal and the natural end of business cycles. Most of these were relatively mild — 1981-82 being a big exception — and recovery was usually speedy and robust.

So our only modern parallel is the Great Recession, a much more severe contraction but one partly caused by overbuilding and shady finance. It took years for housing to recover.

We needn’t quibble over that imprecise historical echo. Just look into the hole we’re in.

Housing starts were 836,000 across America in June. That’s far better than the worst months of 2010, when the numbers were half that, but still at a level that would equal the worst point of previous recent recessions.

The delinquency rate on single-family mortgages improved to 9.72 percent nationally in the first quarter, according to the Federal Reserve. Compared with a recession peak above 11 percent, and the far higher rates in overbuilt states such as Arizona, Nevada and Florida, this is progress. But the historic rate is usually less than 3 percent.

Likewise, residential construction jobs have picked up but remain not just far below the peak of the housing bubble but also lower than historical levels.

Based on experience, one might conclude we have significant upside opportunities. Or, as the Calculated Risk blogger Bill McBride put it, “The future’s so bright, I gotta wear shades.”

And perhaps that is true, especially in cities such as Seattle, with relatively high wages, limited land and diverse economies benefiting from globalization. It may even appear to happen in the short run in places such as Phoenix, where prices fell by more than half.

But digging out of the hole of inventory and debt will take time.

Average Americans are poorer after the collapse, millions remain unemployed and part-time jobs are on the rise. Many younger people are still living with their parents. Average wages are stagnant. All these weights are slowing household formation and homebuying.

By contrast, the boom in housing starts during the 1970s was driven by the baby boomers moving out on their own and purchasing houses because they held secure jobs at good wages.

Tastes are changing, too. For example, a recent survey by the Urban Land Institute showed majorities preferring a shorter commute and a smaller home; living close to shops, restaurants and offices, and having public transit available. Transit is even more important for millennials, who have an even stronger preference for quality urban centers.

As a result of all this, don’t look for housing to return to the commanding position it held in the economy of the 2000s, as our last big-employment manufacturing sector that couldn’t be offshored.

Considering the bust that followed and the environmental damage of mass sprawl building, that’s a good thing. Unfortunately, replacing those jobs and the middle-class wealth creation of rapidly rising house prices won’t be easy.

Finance never sleeps. Subprime loans have gone dormant, but big hedge funds, private-equity outfits and billionaire investors are buying thousands of distressed houses around the country. Turned into rental properties, the income stream could be securitized.

And interest rates are wide-awake.

The Federal Reserve’s effort to boost the economy has rested on purchasing $80 billion worth of mortgage-backed securities every month. Its balance sheet in these assets has gone from essentially zero in 2009 to $1.2 trillion.

Along with historically low interest rates, the central bank has been the backbone of the housing recovery.

Rates shot up with the hint of an inkling by Bernanke that the central bank might back off. He scrambled to reassure the markets that any so-called tapering was far away. But the affair shows how fragile the recovery remains, how much the markets fear bubbles, pullbacks and sharp turns.

Housing is a market that is healing. Barring a shock, it will define the new normal over the next few years. That doesn’t preclude a few more bad dreams.

You may reach Jon Talton at jtalton@seattletimes.com

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About Jon Talton

Jon Talton comments on economic trends and turning points, putting them into context with people, place and the environment in the Pacific Northwest
jtalton@seattletimes.com

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