Outlook 09: Bad Or Worse For The Economy

Housing Divided

AP

If, as Treasury Secretary Henry Paulson has often said, the problem began with housing, there’s a chorus saying housing is the key to any sustained economic recovery. Agreement, however, ends there, as there's considerable debate about when that will happen.

David Rosenberg, chief North American economist at Merrill Lynch, sees another 15 percent decline in house prices. “We don't have a lot of pent up demand,” he told CNBC. “The supply needs to go down.”

On the other hand, optimists point to relatively stable sales over the past year, declines in new and planned construction and the recent sharp drop in mortgage rates.

“We are starting to find the critical elements to a housing bottom,” says David Resler, chief economist at Nomura International, adding a late spring rebound in sales and prices is “not out of the question.”

Trade groups like the Mortgage Bankers Association and National Association of Realtors are more guarded.

The MBA expects rates on 30-year fixed mortgages to plateau at about 5 ¼ percent in the first half of the year, but tighter credit borrowing standards will continue to keep would-be buyers out of the market.  Meanwhile, prices will continue to decline, but more moderately.

“Were it not for the recession increasing joblessness, stabilization is not inconceivable,” says Jay Brinkman, the group's chief economist.

“Rates need to go lower to offset speed of rising joblessness," adds Lawrence Yun, chief economist at the NAR, which expects single-family home sales rising in the first half and prices in the second half.

The NAR is among those that say housing-focused programs are needed in the massive fiscal stimulus plan expected from the Obama administration.

White House, Your House

AP Barack Obama

There’s already enough guessing about the size of the stimulus package that the White House might want to hand out a prize to the winner. Even traditional skeptics, such as supply-side proponents, have joined the betting pool.

In the meantime, it’s a matter of big, bigger and biggest.

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“Six-hundred billion (dollars) is the minimum,” says Behravesh “If they can make it bigger -- $700-800 billion, even a $1 trillion. The latter might make sure we come out of it this summer”

“What’s important is not the magnitude, but the composition,” adds Levy, sounding a common note of caution. His guesstimate is $500-600 billion. 

Thus far, a big part of the funds in what’s likely to be a two-year package appears to be earmarked for infrastructure spending, with the usual social safety net measures and some kind of tax cut for low-and middle-income earners.

Proponents of infrastructure spending say there’s more than $100 billion in shovel-ready projects to get the program off to a swift, meaningful start, creating jobs and income. 

Others say, not so fast.

“There's a limit to how much fiscal stimulus you can do,” says Resler, who, like other critics worries about waste, fraud and pork barrel politics in an infrastructure program.

One traditional worry missing from the list of many economists is inflation. At best, all the money and fiscal stimulus will succeed in stimulating demand, the thinking goes, without accompanying wage and price pressures.

"The increase (in money supply) is necessary but a not sufficient condition for inflation," says Levy. "The turbo-charged Fed easing prevents deflation."

That deflation worry is back on the list.

© 2012 CNBC.com

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