In his quarterly earnings remarks last week, JP Morgan CEO Jamie Dimon made a pronouncement of game-changing significance that "(t)he housing market has turned a corner."
Until recently this has not been the mindset, nor the expectation, of the overall stock market. Yes, housing and housing-related stocks have been surging, but investors haven't acted as if this will ultimately impact the general economy or the general stock market. Whatever recovery has been occurring has been under the radar, and running contrary to the market's conventional narrative of a real estate debacle that continues to wreak havoc and to be a major drag on the economy.
This narrative of despair reflects the extreme damage previously wrought by the housing market. It is now four years since the collapse of Lehman and the onset of the worst housing market since the Great Depression. And there has been significant progress in putting together the conditions necessary for a recovery of the housing market.
Banks have taken immense writedowns and huge numbers of homeowners have endured the trauma of foreclosure and loss. In addition, supply had to be absorbed in the marketplace. That has meant firesale prices and a dramatic slowdown in construction. These were all significant depressants to economic activity, but were essential prerequisites for the housing market to bottom out and to set the stage for a recovery.
Most recently, the data is pointing to a housing market that is beginning to improve. Existing home sales in September were at their highest level in the past two years and year-over-year pricing has begun moving higher.
Dimon's perspective on housing should carry weight because bank-originated mortgage activity is at the heart of the incipient recovery.
Housing activity is benefiting from continued rock-bottom mortgage rates and a growing sense that perhaps such rates will not always be this low. These low rates have also made buying more attractive than renting.
Refinancing activity has enabled many homeowners to reduce their carrying costs, enabling them to spend elsewhere, invest, accelerate their mortgage payment or to save. Each of these provides a beneficial impact on the larger economy.
Like the resurgence of auto sales, greater housing activity also bespeaks greater confidence by consumers. Indeed, consumer confidence levels have been climbing since May. Housing and consumer confidence are intimately related and there is the great potential to see a mutually beneficial virtuous cycle whereby greater consumer confidence boosts housing, which in turn propels more confidence.
This mutual reenforcement could result in the housing market becoming the tow truck that helps pull the American economy out of the ditch.
How? As housing improves, we expect this uptick to feed on itself and become self-perpetuating. In the past year, housing has moved from its greater-than-1% negative impact on GDP to currently having a flat-to-a-modestly-positive impact. This will become nicely positive in 2013.
Construction should pick up, creating good jobs. Sales of home-related items will increase and at a certain point, the initial success in housing sales will beget more success as prospective homebuyers could increasingly fear that prices will move away from them.
In such a scenario the stock market is likely to benefit. Not just from the greater profitability of the companies more directly involved with the housing recovery, but from the overall positive impact on GDP and corporate earnings.