Home sales and housing starts have weakened in recent months, at a time when many in the industry had expected a seasonal pick-up. Federal Reserve Chair Janet Yellen told Congress last week that the recent housing slowdown “could prove more protracted” than expected, particularly with sluggish household formation from young adults who are grappling with large student debt and living with their parents to cut costs.

“My expectation is that as the job market strengthens … we’ll see household formation pick up, but it’s hard to know here what exactly the new normal is,” Yellen told the Joint Economic Committee last week. Indeed, 423,000 new households formed in the 12 months ending in March compared to an average of 1.3 million a year from 2002 to 2006, according to Census Bureau data.

Forty of the top economists recently surveyed by USA Today say that while they are more concerned about the housing recovery than they were six months ago, they do not expect the rebound – which started in 2011 – to reverse course. The majority said they expect housing’s turnaround to be more gradual in 2014.

Stuart Hoffman, PNC Financial Services Group economist, told USA Today he expects housing to make up some ground this year as job growth allows more buyers to qualify for loans.

“Credit availability is key for the continued housing recovery,” writes economists Hui Shan and Eli Hackel in a recent Goldman Sachs report. The economists note in the report that measures – such as credit scores, product choices, income-verification levels – have made lending standards “exceedingly tight.” They estimate that around half of the decline in the household turnover rate between 2001 and 2012 is due to tighter lending standards; the other half of decline from demographic changes or cyclical changes.

Source: “Housing’s Sagging Rebound Worries Economists,” USA Today (May 8, 2014) and “Yellen Offers Upbeat Outlook, but Points to Housing Risk,” The Wall Street Journal (May 7, 2014)

Federal Reserve Chairwoman Janet L. Yellen testified on Wednesday to lawmakers that a slowdown in housing could pose a risk to the economic recovery.

“Readings on housing activity, a sector that has been recovering since 2011, have remained disappointing so far this year and will bear watching,” Yellen said at a hearing of the Joint Economic Committee. “Another risk — domestic in origin — is that the recent flattening out in housing activity could prove more protracted than currently expected, rather than resuming its earlier pace of recovery.”

Weak job and salary growth remain big challenges for housing and the economy, Yellen noted. The government's jobs report in April did show some improvement, with the unemployment rate falling to 6.3 percent — the lowest level since September 2008.

“While conditions in the labor market have improved appreciably, they are still far from satisfactory,” Yellen told lawmakers. “The share of the labor force that has been unemployed for more than six months and the number of individuals who work part-time but would prefer a full-time job are at historically high levels. In addition, most measures of labor compensation have been rising slowly — another signal that a substantial amount of slack remains in the labor market.”

Yellen noted that there was overall stagnant economic growth in the first three months of the year, but attributed some of that weakness to temporary factors like weather. Yellen said she expects the recovery to pick up for the rest of the year.

"With the harsh winter behind us, many recent indicators suggest that a rebound in spending and production is already underway, putting the overall economy on track for solid growth in the current quarter," Yellen said.

Source: “Yellen Sees Improved Economic Growth, Worries About Housing Slowdown,” The Los Angeles Times (May 7, 2014) and “Housing Now a Headwind for Struggling Economy,” HousingWire (May 7, 2014)

Fed Chair Sounds Cautionary Note On Housing