Is housing hurting the economic recovery?

At macroblog, Dave Altig asks whether housing is hurting the economic recovery. He answers with a quote from Atlanta Fed President Dennis Lockhart:

...can we have high-quality growth while the residential real estate and commercial real estate sectors continue to be so weak? Not completely, in my opinion. The recovery will progress, but it will not be robust until we work through the economy's serious imbalances, including those in the real estate sector.

As I look ahead, I think the most reasonable assumption is that improvement of the real estate sector will lag an otherwise improving economy. But I am encouraged by the fact that the economy is increasingly on firmer footing.

Here are more thoughts from Dennis Lockhart on the housing market:

The residential real estate market remains depressed. In my baseline forecast, the housing sector will contribute only modestly at best to economic growth this year and next.

The housing sector impacts economic growth in two basic ways—one direct and one indirect. The direct effect primarily comes through the construction of new homes and production of building materials and household products. Indirectly, the housing sector contributes to growth through its effect on household balance sheets, which can influence consumer spending. Another indirect effect relates to banks' balance sheets and the health of the financial system.

To assess how direct and indirect effects will play out, let me provide some perspective on the state of the residential sector.

Home sales have not shown any clear trend of improvement since the end of the recession, except for a short pick-up during the period of the federal tax credit last year. From the peak five years ago, sales of existing homes are down nearly 50 percent and are close to the 1998 level. New home sales have fallen almost 80 percent from the peak and are at levels not seen since these data were first collected in the early 1960s.

Why such weak sales? There are several explanations. Tougher underwriting standards have shrunk the pool of potential homebuyers. Entry-level homebuyers, who typically have the weakest credit histories, continue to experience the most difficulty in obtaining mortgage financing. And anecdotal information suggests this could be a longer-term issue. At the same time, many potential move-up buyers are blocked because they're either underwater in their current mortgage or don't have enough equity to meet the down payment requirements for a new mortgage. The real estate analytics firm CoreLogic estimates that about 23 percent of residential mortgages are underwater.

On the supply side, existing home inventory levels remain elevated, in part due to the great number of distressed properties on the market. These include bank-owned properties and properties where the loan is in default or the property is in the process of foreclosure. ...

Because of the factors I've discussed, I do not expect significant new residential construction nationally. Thus, it's unlikely that residential real estate will directly contribute much to GDP growth this year or next.