Eric S. Belsky – ‘Propping up the economy’

Although some mortgage company employees have probably felt they were about to drown in the paperwork generated by strong purchase mortgage volume the largest refinance boom in recent memory, their effort has paid off in more ways than one.

According to Eric S. Belsky, executive director of the Joint Center for Housing Studies at Harvard University, high mortgage volume and a strong housing market in all likelihood have been the largest factors in steering the economy away from a deep recession.

Belsky spoke at the first membership luncheon of the year for the Massachusetts Mortgage Bankers Association at the Holiday Inn in Newton last Wednesday.

Usually during recessions, housing and automobiles sales actually drag the economy down, he said. Going into most recessions, housing accounts for one-third to two-thirds of the first quarters of contraction in gross domestic product, he said.

But what’s happening this time is housing is actually propping up the economy. No two ways about it. Not only is it propping it up; last year, overall, the economy expanded at 1 percent. Half of that increase was due to housing, said Belsky.

Specifically, the foresight and early action by the Federal Reserve Board lowering rates in January last year resulted in bond markets easing rates on long-term loans, spurring buying and refinancing. Homebuilding and remodeling, while not contributing to the recession, haven’t contributed to the recovery, either.

Because of all the buying of homes, the wealth effect occurred, he said. When you buy a home, you buy furniture, appliances, etc., Belsky explained, pouring more money into the economy.

So you have that spin. But the biggest part is the refinancing. And refinancing really lines people’s pockets, said Belsky.

When consumers refinance a home mortgage, they usually take cash out – not to invest or deposit in a bank, but to spend, said Belsky, unlike when they draw money out of the stock market.

Nationally, the [approximate] amount that a person takes out in a cash-out refinance is about $18,000. That’s real money. That’s the wealth effect that housing has, he said.

What contributed to the record year in 2001 was that instead of the normal tightening and easing of rates usually performed by the Fed, it reduced rates aggressively.

This was all really good news for you [mortgage lenders] last year. Now the question is, is it good news for you next year? The answer is no. It’s bad news, said Belsky, who added that while housing usually drags the economy into the recession, it’s often the industry sector that pulls it into a recovery as well.

For a recovery to occur, consumers must spend – and spend large, on big-ticket items such as cars and houses. The trouble is, both industries have had a tremendous year in 2001. Even if consumers continue to spend at those rates, it won’t be enough to spur a quick recovery, he said.

The biggest question is whether the recovery will be slow or quick. Belsky outlined factors that could point to either possibility.

One sign of stabilization in the economy is that average hours worked have been up for two months in a row. Although it’s hardly a staggering signal, said Belsky, economists know that often precedes an upturn because, rather than bringing new workers in to meet expected demand, employers first ask more of their existing staffs. So that’s clearly a good sign, said Belsky.

Additionally, tax cuts passed last year, which started with refund checks, will pay off when tax returns are filed this year, he said. It’s going to pump a lot of money into the economy, he said.

Also, inflation is tame so there will not be a sudden tightening of fiscal policy at the Fed, he said. Inventories are up everywhere.

The other plus is that banks are in good shape. In the last recession, we had just come out of a very tough time for banks. Banks were quick to restrain credit. This time they’ve been much less quick to do it, he said. But Belsky added banks have yet to see the final balance sheet for loan clients in this last year of heavy losses, which may still have an effect on credit availability.

Yet, there are several signs that point to a slow recovery as well, including that the economy hasn’t absorbed all the job losses coming and fourth-quarter results from corporations haven’t yet been calculated. Another factor is that businesses, globally, are at high capacity. So even if consumers start to spend, there’s no reason for businesses to kick into high-production mode. Also, the dollar is strong, causing fewer exports, Belsky said.

‘Likely to Slow’
But while businesses don’t want to add to their capacity, they are looking to improve efficiencies, even spending money to do so.

I think you’re going to get capital spending on things that people in Massachusetts tend to work on, [like] software, he said.

The state wasn’t as hard hit by the recession as others – unemployment here is lower than the national average, job growth is flat, there isn’t a glut of people desperately trying to sell their homes. It’s still very unaffordable but while you’ll likely see a recovery, you’re not likely to see it until post the buying season, said Belsky.

Home purchase volume is likely to slow, he said.

Another factor that may have an impact on purchases and refinances is the recent volatility of rates. Despite Alan Greenspan, chairman of the Federal Reserve, making calming comments indicating the Fed is not worried about inflation, the bond market’s anticipation of economic recovery has increased long-term interest rates by as much as 80 basis points in a matter of weeks. That has made it difficult for mortgage lenders to hold onto business, said Belsky.

How do you protect your pipeline when rates go down and [customers] are off to another lender, he asked.

If the bond market becomes convinced that the recovery will be slow, said Belsky, than rates should remain low and housing and refinance activity should continue, although not at the same levels seen in the previous year.

On the refinance side, you’re going to be governed by the interest rates. In all likelihood this year’s going to be off by a good 20 to 30 percent from last year, said Belsky. But in Massachusetts, if rates remain low, the volume may be off by only 10 to 15 percent, he said.

Expert Identifies Mixed Signals For Housing, Mortgage Markets

by Banker & Tradesman time to read: 4 min
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