The numbers released on August 24 on sales of existing homes may even scarier than they look.
Scarier than a 27% drop in July to an annual sales rate of just 3.83 million? Scarier than the lowest annual sales rate in the 15 years this number has been recorded?
Well, yes. Because this figure suggests that all our worst fears about the housing market and the U.S. economy may be absolutely correct. And I think that interpretation of the housing numbers is a major reason that on August 27 Federal Reserve chairman Ben Bernanke just about promised the Fed would go back to its policy of buying Treasuries and mortgage-backed securities to support the economy.
The fears start with the possibility that this huge drop shows that the government’s recently ended tax credit of $8,000 to home buyers didn’t do a thing to actually stimulate the housing industry. Instead, today’s huge plunge seems to indicate that any gain in sales during the stimulus came from borrowing future sales.
At the height of the tax credit sales of existing homes soared to a 6.49 million annual rate in November 2009.
And now that the stimulus program is over, the industry faces an extended period of really low sales as its makes up for those borrowed sales. Economists had projected that sales of existing homes would fall 13% from June’s 5.37 million annual pace.
It might take quite a while to pay back that borrowing too. The number of existing homes on the market climbed by 2.5% to 3.98 million. At the current rate of sales that’s a 12.5-month supply. (And, not surprisingly, that’s the highest level of inventory since 1999, when these numbers start.)
But that’s not the worst conclusion you can draw from this number. If the housing industry wasn’t able to build a real recovery out of a temporary stimulus program, then maybe, the economy as a whole won’t be able to build a lasting recovery out of the $787 billion stimulus package passed by Congress in February 2009.
Certainly that’s a fear worth entertaining. Especially now that the effects of that $787 billion package are starting to wear off without any appreciable surge in job creation that would demonstrate that the stimulus created a self-sustaining recovery.
In examining that fear, though, it’s important to note that ways that the much bigger total stimulus package is similar to and different from the home buying stimulus effort.
Parts of the overall package did indeed resemble the demand-pull emphasis of the home-buying subsidy. The cash-for-clunkers car buying program, for example, pulled current sales from future sales just as it looks like the home buying-subsidy did.
Some parts—such as the infrastructure spending in the stimulus package–are clearly not demand-pull programs but actually add to economic activity in the present without pulling from the future.
Unfortunately, as critics of the way the stimulus package was structured have pointed out for a year and a half, most of the package went to tax cuts and entitlement spending. Only $275 billion, or 35% of the total, went to contracts, grants, and loans that could, in even the loosest sense be called infrastructure spending.
The good news in that category is that only 50% of that $275 billion had been paid out as of August 13, 2010, according to the Recovery.gov web site. There is still some stimulus Money in the pipeline. (In contrast 77% of tax cuts and 63% of entitlement spending in the package have been paid out.)
At the least the housing numbers should revive a real debate about whether the U.S. economy needs a second stimulus—and one that’s structured to make up for the deficiencies in the original package.
Of course, with the electoral silly season just about upon us, a serious debate about stimulus and the economy is exactly what we won’t have any time soon.
Which leaves me hoping that existing home sales numbers aren’t as bad as they seem right now.
South,
Ventura County. We’ll just have to agree to disagree!
Two year
Sig, yes I see your point. Thank you for the edification.
Two Year, rents are rising in San Diego County, and we had massive overbuilding of houses and a bubble pop after the summer, 2005 peak. I don’t know where you live but locally, the peak of the bloodbath is behind us, not ahead of us. Even at 4 years excess supply, the future is brighter than the past. 4 years is “forever” only if you’re a day trader.
South,
I think (???) you’re mostly responding to Sigli but I can assure you that housing values were, in fact, driven by easy credit. Of that, I don’t think there can be a dispute.
I’m glad you brought up rental cost. Yes, they certainly didn’t rise with home prices (way too many house then) and, interestingly, they still aren’t rising with so much homeowner displacement. Hmmmmmmmm, I wonder what that means. Perhaps too many houses?
I understand what you’re saying South, but you’ve missed the simple Econ 101 point. What I’m saying isn’t political at all.
A high cost of living discourages people from taking lower paying jobs. The market still wants a certain product at a certain price. If it isn’t made in the USA due to a refusal to work at a certain [low] labor rate then the labor will be found elsewhere if possible. Structurally high costs push employment elsewhere. This is true worldwide and throughout time. I don’t know what facts you’re looking for, but there are more than enough economic studies that have verified this simple idea.
The higher housing asset prices rise the more disadvantaged US labor becomes. Read up on Purchasing Power Parity, and follow that up with some study on the effects of minimum wage laws. You may also want to look at other costs of business, and you’ll see US industry has certain advantages (rule of law, the most competitive railroad, reduced shipping costs, etc.). There are ways to overcome low labor competition. High real estate prices are not it as it effectively lowers purchasing power when someone can’t afford to sleep. This is what was meant by “labor had to be too expensive by necessity”.
Just as another FYI, balancing the trade gap (read Americans working for less) raises US per capita income by definition. Something may feel like stagnant or falling wages, and may even be supported by data mining techniques, but the actual result is not the same as the feeling. People working for less raises everyone’s standard of living and keeps the money inside the USA, where it can be taxed or respent by the individual.
But your facts don’t fit your theory. We haven’t had “an environment where labor had to be too expensive by necessity.”
Wage growth has been stagnant. That’s why the country has been living on credit- HELOCs, Credit cards, student loans have financed the SOLs, not increasing wages. When teh spigot of lending got turned off was when armaggedon set in.
And I haven’t seen any studies that show the price of rentals kept pace with the (bubble) price of owned homes. So your argument that easy credit is what made house prices rise which in turn caused labor costs to go up justifying Corporate america sending jobs to Calcutta isn’t supported by the facts. Its built on false premises.
Sigli,
Not to have a love fest with you, but your “livable wage” post seems spot on to me. As to Ross and what the future holds, it seems obvious to me, on a macro level, that SOL’s must continue to flatten out for those around the world with comparable skill sets. Of course there are small macro issues in play (Santa Barbara is nicer than Calcutta), but big picture, I think the dye is cast.