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.
It’s fascinating to see such varied political positions all in one place on this blog. But whether you’re on the left or the right, based on my reading of what you folks said above, one fact remains. And that is that we now have to compete on a global scale. But that’s not really possible, is it? Corporations can go anywhere to hire the cheapest labor, but I can’t (easily) move to the country where my job went and take a job there. I think one result of globalization will be that Americans will find out what it was like to live in Nicaragua in 1957 or so.
As to the political debate, can someone explain to me how 1. policy pushing housing prices sky high, causing high cost of living, 2. created an environment where labor had to be too expensive by necessity, 3. which pushes jobs to lower cost areas, 4. is a trickle down problem?
Maybe $10/hr. labor would be a more “livable” wage had fannie, freddie, Greenspan, Bush, and Bernanke, Reagan, Clinton, Carter, and LBJ (I’ll leave congress out because they obviously have nothing to do with all of this, right…) not pushed the price of housing up 6%/year for 50 years, while wage increases grew much, much slower. It’s no wonder in my mind that we cannot compete on wages as low wages now mean starving conditions.
But hey, let’s blame the American system and chide trickle down to score political points. Who was it that kept saying houses are not assets? Must have been a pretty smart feller.
South,
My calculations are 6 million homes built from 1990-2010 in excess of household additions. This is in addition to the roughly 7 million empty units that is “normal”.
The argument that houses will be filled by those who moved back into mom and dad’s basement is irrelevant when looking at household additions:housing units built. That is, they added even more temporary oversupply that they’ll just soak back up later. This does nothing to alleviate the structural oversupply problem.
Using your numbers of 15 million household additions over the next ten years, we already have enough houses for the next 4 years of population growth.
I’m afraid twoyearfixed is spot on here: Housing isn’t going to lead anything until the excess is removed.
BTW, building 1.5 million houses/year adds 4.5 million jobs (estimate) + all the support and service jobs that come with new/expanding communities. That’s a helluva lot of lost jobs due to oversupply.
Fixed, according to a June, 2010 study from Harvard’s Joint Center for Housing Studies (or some such thing) as reported in the WSJ:
The echo-boom generation is already larger than the baby boomer generation, and the baby-bust generation born between 1966 and 1985 is nearly as large. Add immigration projections, and household growth should approach 15 million from 2010 to 2020, according to the report.
US Census bureau projects a US population of 340 million in 2020 (about 30 million more than current estimated population).
As long as US remains a destination of choice, our population growth will fuel a need for housing.
Do you have any data on the number of homes built during the 1995-2005 period to support the contention that so many were built during that period that those houses will fill the demand without the need for additional supply?
There might not be a shortage of housing in Cleveland or Detroit, but there will be in San Antonio and other fast growing population centers, if new housing is not brought online. It’s simple demographics.
I wonder if the Reagan Treasury guy has contemplated suicide, given the debt problems began under his watch.
I listened to a treasury guy who was in the Reagan administratiuon, on radio the other day, he said forgit a recovery.
Essentially he said we have too much debt, and the jobs went to China so there is no way to pay the debt off.
No jobs in the private sector, so no wealth building, so no recovery.
South,
You’ve always struck me as a sharp dude so maybe you’ll be correct. I live (and have for 25+ years) the Real Estate and Finance business and, so far at least, have been pretty accurate, especially the last 4 years. Remember, my point wasn’t about job growth, demographics, another boom/bust, etc. It was simply the biggest picture I could think of and, understanding the loans made, the obviousness (to me) that we have WAYYYYYYYY too many homes to see a bottom for a long time. Also, on the micro front, what you’re gonna see even further (based on job losses and other things you correctly point out as issues) is a reluctance for people to buy non-owner occupied homes virtually regardless of price. They (potential buyers) want no added home ownership costs and/or risk. It’s the opposite of Banks not Foreclosing. They (the Bank) want the “owner” to keep up the house/yard/pool even if they receive no PI payments and they can’t afford the domino risk of foreclosure.
We have far, far too many houses my friend.
South,
I doubt anyone would publicly state that is what happened with the money, but that is what happened. The decisions to do that were based upon wanting to keep staff onhand believing that this downturn would be shallow plus nobody wanted to own up to the cuts that were going to be required.
Fixed,
There are places that are horribly overbuilt but that will work itself out in time. Most places are not, or only slightly, overbuilt and the housing freeze currently on is going to give a boost to prices at some point. They are starting to build again in some areas. Most places will see steady housing growth over the next decade.
fixed, I agree with your last point but not necessarily your first. Yes, there was overproduction of houses. Yes, it was in part caused by poor underwriting standards. But to say “we have no way of filling” the houses that were built is overstating it.
The number of households will grow and the demand for housing will grow with it. At somepoint, jobs will pick up and all the people who moved in with their parents, kids, friends and family will move out into their own homes.
South,
Why? Because those loans enabled an inventory of houses to be produced that we have no way of filling thru your 4 points. At least for a very, very, very long time. I do have friends who disagree with me though. Of course, they’re spending their time and money on flipping houses, so they’re just selling their book.
The political debate fascinates me. The real issue/problem is there’s some dude (or a billion) in China with a 120 IQ, a dream and a work ethic . And he’s willing to work for $10 a day. Our SOL is getting walked down no matter who’s in charge. The rest is just idealogical chump change for Beck and Olberman to argue over.
@dvacbr – forcing movement of money will accomplish nothing unless production is increased. There must be some value received from the expenditures; increasing federal debt only to postpone the problem does nothing but exacerbate the problem.
surf, regarding your second point- I’ve heard that before somewhere. Do you have any source material, or is it simply your opinion/anecdote based on your personal experience?
jaristrunk
You start with a complaint about politics, and then the rest of your note turns out nothing but politics. Repeated economic studies have demonstrated that lowering taxes, although good for and economy, is one of the least effective. “Capitalism works well if you don’t impose high taxes on the people and businesses.” The thing is that it also works well if you do. The 1950’s proved that. The Clinton years proved taht.
An economy is the movement of money. The more efficiently and rapidly it moves is a measure of the economy’s health. Thus to force movement of the money is the goal. Lowering taxes does nothing to overcome the reluctance of business owners and bankers to move into action. Extending unemployment benefits has immediate impact as people try to maintain living standards. Hiring incentives may help, but eventually inventories will build.
We are having tough problems, and the various cliches that come out of politics these days are not the answer.
Two things:
1) One take on the drop in existing home sales is that we are reaching the point where sellers aren’t going lower unless forced to (moving, bankruptcy, etc) and buyers are waiting for the prices to slow their downward trend. If true, this is a good thing in that we may be coming to some sort of a bottom. This is only true where there isn’t a glut of housing.
2) The money spent on infrastructure was mostly a waste. Here’s why: The money was spent on projects that were “shovel ready” meaning that they were already in the pipeline and funds had been appropriated towards them by cities and other agencies. When the stimulus money came around, they spent the federal money on the project and then used the previously dedicated money to keep staff that they eventually laid off the following year. So the only thing the stimulus money did was to keep the unemployment numbers artificially low. To qualify this, I am in this business and believe that the best use of stimulus money is in infrastructure. This money did very little to stimulate new spending. Very few cities used money that had been previously dedicated and replaced by fed stimulus money to fund new projects…
Ed,
Thanks for the info, I agree this is a stock on my list that I would only consider if there is a selloff in the market and I could pick up at a better price.
java12jack,
On CKP, it worries me to see a stock with a P/E of 22 that looks like it is priced on future growth in this economic environment. If the markets do crash, stocks like that will take the brunt of the fall. With institutional ownership at 89% of the stock, this one screams “potential crash victim”.
Mind you, I don’t see anything particularly wrong with the financials. But if the company does interest you, I’d wait.
skscion,
You’re right. Unless a Depression alights on our shores, we’ll have 1, 3 and 4. And there has not been an increase in wages in decades but that didn’t stop real estate prices from going up, even adjusting for the bubble years.
If houses continue to sell at 40 and 50% of replacement costs, the smart money is buying housing.
It’s been a while since I took Real Estate Appraisal 101 but as I recall there are only 4 reasons that single family residences appreciate over the long term.
An increase in population
An increase in wages
An increase in raw material costs.
A decrease in developable land
Ed,
Off subjuct what are your thoughts on CKP?
jaristrunk,
Actually it was freedom from taxation without representation. By the time the Declaration of Independence was written there was only one tax on the colonies, tax on tea. It hardly was a crippling tax, but it was left in place to prove who had the power (the king and his government, not a “colony”). The colonies didn’t want to be “sub-citizens”, they wanted to be full members of Britain (or be free of it).
Wow, so much political rhetoric.
You people need to spend a little time learning what Capitalisn really is; as well as what it it will take to turn this country around. It’s JOBS. The current administration doesn’t seem to have a clue how to help. Throwing money at it won’t help either. Reducing taxes and spending WILL.
However, it is also important to understand that we have a bigger challenge now than we did in the past. We are now living in a Global Economy. We are competing with the other countries of the world much more than ever before – and we have to learn how to deal with it. The way to deal with it? COMPETE. That’s the American way – that is Capitalism. Capitalism works well if you don’t impose high taxes on the people and businesses. Isn’t that what the Declaraton of Independence was all about in the first place? Freedom from taxation? Freedom to succeed?
my 2 cents, trickle-down economics doesn’t work! This economy is going to be slow for years to come. The companies ran it into the ground, there is really nothing anyone can do other then time.
Companies have done what was needed for them, cut cut cut. That is what American people have to do is cut.
I’m dividend on the continuation of unemployment part of me says people need it the other part says people milk it. So maybe continue unemployment with more rules? (it’s a start)
I don’t think the banks have spent all the money the fed gave them, what did that money do for us American’s.
And companies over all have more in cash then in 60’s.
So if companies are sitting on money, and american workers are sitting on unemployment nothing is going to happen
Cheap South wrote:
“In the US every administration is pro-business (corporations run this country!!!).”
Agreed 100%. This makes the US system of government very similar to fascism.
Definition of fascism from Wikipedia:
“Fascism, pronounced /ˈfæʃɪzÉ™m/, is a radical and authoritarian nationalist political ideology. Fascists seek to organize a nation according to corporatist perspectives, values, and systems, including the political system and the economy.”
What’s amazing is that businesses still complain this administration is not pro-business enough! They want a full-fledge fascism.
–
ya know, my father is a part owner in business in rural midwest and they have tried to hire the “local American” boys to do the lower level jobs at $10 an hour and he has had more problems with the local boys getting thrown into jail, quitting etc than he has from the workers (legal of course) they’ve hired from Mexico. Granted this is just one part of the our country but I question how many of our “American” workers are willing to do the hard, dirty work if the manufacturing came back to the US.
Well said, Two South. When I read mhebert69’s comments, I was thinking, “Here’s somebody spouting that trickle-down nonsense again.” Like you say, too many businesses use subsidies & tax breaks to hire foreign workers & build foreign factories. As a 1st step to push business to hire more Americans & re-build our manufacturing base, Congress needs to repeal or reduce tax breaks for companies the offshore or that have offshored American jobs. That way, if business doesn’t do its part to hire Americans, govt can use the increased tax revenues to do so. By the way, although I’m an investor out to earn a profit, I will gladly sacrifice my return if it results in meaningful benefits (i.e., more jobs & factories) for my fellow Americans. To me, that’s part of caring for your country & its future. I find it disgusting that American business seems to think so little about the livelihood of fellow Americans.
Well said, Jim. All the ‘stimulus” or “incentives” just moved sales from future months or years to current.
Regarding housing, I posted pretty intensively several months ago. As I said then, I did quite market research few years ago both in coastal and inland states. My conclusion: OVER SUPPLY even then. Now with this continuing high unemployment, it’s even worse. But government’s popping up of the real estate is very scary too. Tax payers are taking in mortgages that are either already or soon will worth much less.
@twoyrfixed – you are absolutely right. Here in FL (paradise??) we can’t even give away homes. Way overbuilt. In 2005, we had people with reservations on over 20 condos for their “portfolios”. And the builders kept on building; by the time they required for the units to be owner occupied, it was too late.
@mhebert69 – wake up and stop drinking the kool-aid. In the US every administration is pro-business (corporations run this country!!!). And businesses in return, moved their factories to China.
Trickle down economics assumes that fat cats invest creating more jobs; and they do, but in China. They have us by the balls. We can’t even remove the subsidies of the oil industry (one of the wealthiest) because they threaten us with huge lay-offs if we do. This is a very mature industry that does not need subsidies.
“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”.
Another stimulus is insanity!! We cant just keep throwing printed money at the problem and bankrupt our children and I certainly dont believe that the Chinese will allow us to do that. My God, we are screwed.
Without Jobs!! their will be NO recovery in housing or the economy of the USA. Is their an urgency from our government or Obama to focus on the economy? to be pro-wealth? to be pro-capitalist? to be pro business? The answer is a resounding NO. Quit drinking the kool aid!! If we just had a leader who would inspire the American people and be pro business. Hope and Change people!!
Why?
Jim,
I have one area of expertise in life and that’s the Mortgage/Housing business. Sorry for the conceit but sometimes it helps to cut through the clutter.
Our overriding problem is (and will be for many years), we have WAY TOO MANY HOUSES.
I’ve found (and have been guilty of it myself in the past) that a little knowledge about a lot of things clouds the obvious when dealing with specifics. For instance, common sense tells me we have a global Ponzi scheme that can’t last. But I put about 75% of my liquid net worth in investments you suggest because I think you understand the big picture in investing FAR more than I.
My point……. you can write off the chance of housing leading this recovery. Our mess is a decades long challenge. Those loans that were written (and the leveraged used!!!) in 02-07 are truly economic game changers.
Just my .02