Wednesday, May 25, 2011

Horrific Housing Data Predicts Continued Economic Sluggishness

It's no secret that the housing sector has been a drag on the US economic recovery. But different pundits are putting different spins on the recent data showing flat April home sales at, to quote Kelly Evans from the Wall Street Journal, "a seasonally adjusted annual pace of 300,000."

Evans compared current sales to the past with this chilling passage,

"Unless sales pick up materially this year, 2011 will mark a sixth year in a row of new-home-sales declines and the fewest sales since records began being kept in 1963. One statistic tells the story: The 323,000 new homes sold in 2010 was less than 60% of the number of new homes sold in 1963, even though the population today is nearly two-thirds bigger."

According to Evans, "housing is the business cycle."  She concludes her Ahead of the Tape column by contending,

"We are stuck today, as in the 1930s, in a household recession triggered by excessive debt levels. These, unfortunately, can take many years- not months- to fix."

It's now almost ten full years since 9/11, when Alan Greenspan lowered rates and kicked off the post-technology equity bubble mortgage finance orgy. What is so troubling is that it apparently never occurred to Greenspan, nor his successor, current Fed chairman Bernanke, that allowing the housing sector to create its own asset bubble would be such a crippling, lasting mistake.

Whereas the technology company bubble involved much intangible value which rapidly grew, then shrank, in web-based business, the housing sector bubble left real physical assets that have overhung the market in ways not seen for literally decades in the US economy's recession-expansion dynamic.

Reading Evans' column gives one pause to wonder how, if the last two Fed chairman could make such a huge, fundamental mistake with their gross mismanagement of the money supply and associated interest rates, just why are we so afraid of significant change at the Fed. Perhaps in the direction of Friedman's automated monetary policy ideas?

Surely before 2000, the Fed contained at least a few capable staff economists who knew of the historic role a vibrant, growing housing sector had in driving the US economy. Were they really completely blind to how the easy money policies of Greenspan were building a large pool of unaffordable housing? Even during the bubble, the Wall Street Journal and CNBC regularly featured pundits who pointed to unaffordable ratios of mean income/mean home price and their changes.

Now that we're saddled with the outcome of the housing-fueled financial mess and its effect on the economy, as Evans notes, we have both physical housing assets and excessive household debt related to it. Plus the continuing depressive effects of soon-to-be-foreclosed houses on the values of currently-occupied homes on which mortgages are still being paid.

While some pundits have suggested literally plowing unoccupied housing under, to magically reduce their affect on the value of existing homes, some entities will have to record those permanent losses. Equity will be destroyed.

Is that really a cure for what ails the US economy now? Is it really intelligent to simply zero out even more housing value on bank balance sheets? Or transfer the losses to government balance sheets?

Meanwhile, recent housing news is abuzz with forecasts of more price declines, perhaps fueling even more foreclosures. At this rate, who in their right mind would borrow- or lend- to build a new home?

I can't help but think that most of this mess, including the cocaine-like effects of QE2, are just more symptoms of our inability to let market forces work on problems like the housing bubble.

Michael Steinhardt opined as much in a March, 2009 appearance on CNBC. I wrote at the time of Steinhardt's observations, including these two,

"The current administration seems to be attempting to skip the 'restructuring of debt' step necessary to any economic recovery, and moving directly to flooding markets with liquidity, while leaving inept managements, such as auto makers and commercial banks, intact, rather than force them through bankruptcy. Steindhardt clearly indicated a disbelief that this will work or be productive.

-What is meant by a "depression" in our current environment? Due to automatic stabilizers, i.e., transfer payment mechanisms, Steinhardt believes that an unemployment rate as low as 12% will trigger consumer behaviors and public sentiment generally associated with much higher 'depression' unemployment levels."

Kelly Evans' focus on the horrific current housing statistics seem to reinforce Steinhardt's thoughts of over two years ago. Unemployment and housing sector activity are certainly related. So continued severe weakness in the latter is continuing to have an impact on the former. And there seems, as Evans contends, to be no simple nor quick resolution.

No comments: