Is housing holding back recovery?

By R.A. | WASHINGTON

THIS morning, several news outlets are reporting on new home price data from Zillow which shows that prices fell 3%, quarter-on-quarter, in the first three months of the year. That's in line with Case-Shiller data and not particularly surprising. Interestingly, it seems as though Fannie and Freddie are unloading a lot of foreclosed properties, a development which is holding down prices. Obviously, this effect is concentrated in markets with lots and lots of foreclosures—largely those in the West, Florida, and other hotspots like Atlanta and Detroit.

Kevin Drum reads the news and writes:

Most analysts now expect that the housing market won't bottom out until sometime next year. Until that happens, it's unlikely that that the sluggish economic recovery we're seeing right now will improve much.

I wish he'd explain that a little. What's the mechanism he has in mind? For new housing consumers—renters and buyers—falling prices are a good thing; they boost disposable income. Falling prices may delay a recovery in construction activity, but even during the housing boom years the most residential investment ever contributed to the real GDP growth rate was 1.04 percentage points, and most quarters the contribution was well below that. Housing simply isn't going to lift GDP growth from 1.7% to 5%. I suppose one might argue that rising prices would allow more household to borrow against their homes, boosting consumption, but it's difficult to imagine that phenomenon recurring in strength for some time, particularly given how diminished home equity currently is. So what's the relationship Mr Drum is looking at?