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Kass: A House Divided Against Itself

This column originally appeared on Real Money Pro at 8:38 a.m. EST on Jan. 28.

NEW YORK (Real Money) --

We're beginning to hear noises that we've reached a major turning point in the housing market -- and that, with interest rates so low, this is a rare opportunity to buy. But are such observations on target?

It would be comforting if they were. Yet the unfortunate truth is that the tea leaves don't clearly suggest any particular path for prices, either up or down....

The bottom line for potential home buyers or sellers is probably this: Don't do anything dramatic or difficult. There is too much uncertainty to justify any aggressive speculative moves right now. If you have personal reasons for getting into or out of the housing market, go ahead. Otherwise, don't stay up worrying about home prices any more than you do about stock prices.

I can't offer any clearer picture, and I don't see a solid basis for anyone else to do so, either.

-- Dr. Robert Shiller, "A New Housing Boom? Don't Count on It," The New York Times (Jan. 26, 2013)

  • A real estate recovery is under way (led by multi-family starts), but a full-blown housing recovery is probably a few years away.
  • A 2013-2014 recovery in the housing market (and for the consumer in general) will be impeded by the fiscal drag of higher individual tax rates and lower government spending and possibly by higher interest rates.
  • Construction activity represents a relatively small fraction of GDP -- its aggregate impact on domestic economic growth is being overstated by many.

Today there is an almost unanimous view (from John Paulson to nearly every other hedge-hogger and talking head) that the strength in housing will be the most important factor (or one of the more important factors) in offsetting the fiscal drag associated with the spending cuts and tax rate increases (necessary to pare down the burgeoning U.S. budget).

To many, a booming housing market seems to be an almost single justification for ambitious economic growth targets and for an enthusiastic view of the U.S. stock market.

Optimism surrounding the housing market wasn't the case 18 months ago -- indeed, back then there was a great deal of skepticism (that I didn't share).

Over the past year and a half I have consistently made the case that the housing market's upside would surprise most investors over the near term and that the U.S. residential market is likely to embark upon a durable and multiyear recovery.

The key points I made in my prior analysis were that the benefits of historically low mortgage rates, vastly improved home affordability and pent-up demand (once the U.S. economy and jobs market stabilized) would yield higher home prices and rising sales turnover. Some of these factors remain in force, but other depressing factors have been introduced that could produce a halting consumer, uneven housing activity and less certain home pricing over the course of 2013.

While I remain of the view that a durable housing recovery is in place, I am less optimistic about the next 12 to 15 months.

As Yale's Bob Shiller cautioned this weekend's New York Times and as Barron's' Alan Abelson chronicled over the weekend, the housing recovery may not be steady in progress, smooth in growth and uninterrupted in its trajectory.

The fact is that housing as a series (in activity and prices), more often than not, exhibits volatility -- even when it's on the way toward recovery.

In early 2013 the U.S. consumer faces uncommon hurdles that could adversely impact the housing markets and lead to disappointing personal consumption trends.

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