If This Stat is True, The Economy is Months from Recovery

by JT McGee

If this statistic from BusinessWeek’s reporting on Consumer Confidence is true, we’re so close to economic recovery:

The share planning to buy a house within the next six months jumped to 6.9 percent, the most in data going back to 1964. The previous all-time high was 5.5 percent.

Let that sink in. According to the latest Consumer Confidence survey, more Americans today plan to buy a home in the next six months than in any point in time since 1964. Actually, it goes even further back then that, since 1964 is the first time we actually measured this consumer confidence statistic.

Why Homes Matter

Homes are the biggest single source of leverage in the American economy. Homes are one of the few things that can be levered 5:1 to 28:1 (FHA.) Home sales vastly increase the supply and velocity of money. And, as we all know, we all work for the housing sector. Remember, 75% of all GDP growth during the real estate boom was the result of financing from home sales.

Home sales are a really big deal. The American economy lives and dies on financial leverage from real estate.

Home sales are also highly indicative of improved consumer confidence. Look, you’ll buy a McDonald’s Big Mac regardless of how you feel about the economy, but you won’t buy a home without feeling secure. The fact that 1/15 people surveyed are planning to buy a home in the next 6 months is unreal.

Only one Problem

There’s only one problem with this statistic – it measures intent. Planning to buy a home is not actually buying a home. It’s not getting approved for a loan and signing a deal to close on cute little house with a yellow kitchen and a white picket fence.

Banks have extraordinarily tight lending standards today. Ben Bernanke recently spoke on the subject of home sales, noting that he was concerned about tight lending standards which are keeping homes from being sold.

I think this problem is temporary. I wrote about bank stock ETFs at ETFBase and covered some of this ground already. Banks have a huge backlog of refinances to deal with, so they’re not yet hungry to originate new loans. Why find new customers when you can steal a customer from a competing bank? Why not rely on survivorship bias to target refinances, which you know are likely to perform better than a new loan from an unfamiliar face with no track record of repayments?

From the Mortgage Bankers’ Association’s Purchase Applications Index, we discover that roughly 80% of all applicants are seeking a refinance. Only about 20% are buying new homes. When banks work through all these refinances, they’ll have to loosen lending standards to keep up loan volume.

Failing catastrophic economic events like going over the fiscal cliff, a war with Iran, or a Eurozone fallout, we should be less than a year away from consumer-led economic growth. It’s always good to see that the biggest tailwind for economic recovery (housing) is drawing record attention from potential homeowners.

{ 6 comments… read them below or add one }

krantcents December 6, 2012 at 16:24

Let’s say that the number is wrong or it ends up lower. I like the trend and any increase in consumer sonfidence means more spending which helps the economy. Now if it is all borrowed funds (adding to consumer debt) it probably is not quite as good. The consumer confidence is positive is a good thing.


JT December 8, 2012 at 15:01

I like to think that going into debt today is probably one of the best decisions you could ever make. I’ll take the current rates fixed for 30 years with glee.


Mandy @ MoneyMasterMom December 6, 2012 at 21:59

I was feeling kinda excited until I got to the problem. The lending standards need to be tight. It was loose standards that got all the crazy started in 2008.


JT December 8, 2012 at 15:02

Well, today’s “tight” is much more tight than years gone by. Loosening standards even a little bit would have a tremendous impact on lending volumes, without taking us to extremely loose standards of the early to mid 2000s.


PK December 7, 2012 at 11:53

100:1, FHA + Down Payment Assistance (local programs). I can point you at some local to me, haha.


JT December 8, 2012 at 15:03

I’ll play that game! 100:1?!

If you owe the bank $100,000, the bank owns you. If you owe the bank $100 million, you own the bank. Who wants to give me $100MM?


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