Housing – Why All the Huffing and Puffing?

Analyst Sam Stovall wrote a most insightful article regarding brief historical lessons regarding past housing contraction cycles and resultant recessions. The article from Business Week is entitled, “Housing… Why All the Huffing and Puffing?”

While the entire article is certainly worth reading in detail, here are some key highlights:

“We think increased investor concerns… could be related to history lessons, which show a high correlation between declines in residential construction and recessions…. Every recession since 1960 has been accompanied by a year-over-year decline in residential construction….”

“Though all recessions have been accompanied by construction declines, not all construction declines resulted in recessions.”

“Wyss pegs the likelihood of a recession at 33%, and the reason we don’t expect this to happen is due to the breadth of the overall economy and foreign investors’ interest in a weakening dollar and the dollar’s positive impact on export demand. We also expect a proactive Fed and Treasury Department to get ahead of a recession curve.”

The author notes the positive impact that the dismal decline in the US Dollar Index will have on exports. Recall that cheaper (relative) dollars make foreign exports more attractive, meaning more sales for US companies. A falling dollar is not nearly as negative as some writers would have you believe.

Refer to the entire article for complete insights. Stovall conjectures that, although the housing decline is devastating, it will not crush the overall economy because of other forces, including a pro-active Federal Reserve and increased exports due to the falling dollar.