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Housing Inflation and the Economy

Has housing hit the bottom? Is inflation heating up? What is the real Gross Domestic Product “GDP” picture? These are the questions we must ask in order to obtain a national and local outlook on the economy.

Gross Domestic Product
The debate goes on as to when the official date of the recession will be declared. Although exports have been propping up the economy and it appears to still be growing, we must take a closer look. If we take out the net foreign trade (exports minus imports) the GDP numbers say the economy shrank 0.2% in the fourth quarter and then slowly picked back up. The general consensus of most economists is that we are in a recession and some feel we have been in a recession for the past three quarters.

National Housing Outlook
Has housing reached the bottom? If you trust the former fed Chairman Allan Greenspan the answer to the question is yes. Greenspan was recently quoted as saying “worst may well be over.” Greenspan sites applications for new mortgages have flattened out as opposed to continuing to fall. Greenspan says this is an important indicator that the worse of housing troubles is behind us.

Inflation
Perhaps the biggest risk to the economy is inflation. A close look at the consumer price index (CPI) which is a key indicator of inflation, from 2002-2007, shows the average for inflation to be an acceptable 2.7%. Taking into consideration that oil prices have been surging, it is safe to say that inflation had been fairly contained. Now inflation appears to be finally heating up. The consumer price index is projected to hit 5% in 2008. However, a faltering U.S. economy and evolving weaknesses overseas should lessen the global appetite for commodities, which helps to keep inflationary pressures in check.

Local Economies Weaken
Some strong local economies are finally showing some weakness. Although the national economy has been faltering, local economies such as Houston have been bucking the trend. However, recent data shows that even those local markets such as Houston are finally slowing. After Houston added close to 100,000 jobs in 2006 and 2007, its job growth now is running at a pace of only 40,000 per year. Houston’s June existing home sales, for example, were down 15 percent from 12 months ago. Although local job growth has slowed, continued economic expansion has been a key element in stabilizing prices. Even with these weakening numbers oil and gas continues to help Houston and Texas buck the trend. Rig count is up after holding at 1,700–1,800 working rigs for 15 months, the rig count moved above the 1,900 level in the second quarter. For the most part high oil and gas prices have buffered Texas from the overall economic downturn.

Economic Outlook
It appears that the overall economy will head into a bumpy recovery rather than a rapid ascent, mainly because housing has not yet hit a “definable bottom.” On the other hand, exports remain strong. So it appears that rather than a deep recession or a strong rebound, we are headed for a period of stagnant growth. In other words: it will be a bumpy recovery.

Cliff Pape

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