The Housing Mirage

http://www.washingtonpost.com/wp-dyn/content/article/2010/08/24/AR2010082403533.html?referrer=emailarticle

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"If you don't live it, it won't come out of your horn." (Charlie Parker - Musician)

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Here's a quote from the Wall Street Journal Editorial Board today: "With the exception of temporary bubbles caused by reckless monetary policy, rising home prices are merely a symptom of a vibrant economy, not a cause. The true cause of economic growth and higher living standards is rising productivity, which occurs when societies wisely invest in many things, such as new technologies and new ways of doing business. Housing is just one of those things. Setting as a goal the maintenance of high levels of investment in housing has obvious political appeal, but it's junk economics for a nation that wants to innovate and grow."

This is from an editorial that was occasioned by the reports just out on sales of previously built single-family homes indicating that they dropped 27.2% from June and 25.5% from the same time a year ago.

One of the economists quoted in the Post article we've attached refers to that data as so outside the statistical norm that it took even the most pessimistic economists by surprise. That same economist went on to point out that part of the reason home sales are collapsing is because prices are not low enough to clear the market.

Given that a 5 to 6 month supply of homes is the "norm" in the market, it would take 12.5 months to sell all homes available at the current sales pace.

So, we're back to that old "lagging indicator": JOBS. We've pointed out before that, until jobs come back, there is no recovery. This includes housing. There's a big inventory out there that's not getting sold.

Today, Catherine Rampell points out to us that "New Home Sales" (NY Times Economix Blog) were at their lowest level in July since the government began keeping track in 1963. If you go to the site and look at the seasonally adjusted trend line for new home sales, it looks like the sales volume has gone off a cliff! This is not "recovery."

Macroeconomic Advisers, a respected forecaster, has lowered their third quarter GDP forecast to 1.7% after having had their estimate at 2.1% as recently as Tuesday of this week.

If we could draw a trend line thru the lowered ("adjusted") GDP forecasts throughout this year, we should probably hit zero in time for December. We noted with interest today that a Republican had called for the resignation of the President's Economic Council members. We assume that person thinks such a move will fix the problem (does this mean that, if we just put a few Republicans on the "Economic Council", that GDP will suddenly go up?). One of the "members," Christina Romer (Chairwoman of the President's Council of Economic Advisers), has already resigned.

What will fix the problem is jobs and jobs will come with capital investment which is on the sidelines waiting. Other big money (like Private Equity) is also on the sidelines waiting. Ask a Top 500 CEO why capital investment is on the sidelines "waiting." The answer you get will probably involve an unsure regulatory and tax environment.