Opinion

James Saft

Housing raises US recession alert

March 24, 2011

James Saft is a Reuters columnist. The opinions expressed are his own.

If housing is the primary force behind the U.S. economic cycle, then the recession early warning bells just started ringing.

Sales of new single-family homes recorded a shocking fall in February, tumbling by 16.9 percent, to a seasonally adjusted 250,000 annual rate, hitting the lowest such figures since records began in 1963.

New home sales are down 28 percent compared to a year ago and the inventory of unsold new homes is now equal to 8.9 months of sales.

Even more amazingly, in a nation with more than 110 million households, there were just 19,000 single family home sales for the month on a raw unadjusted basis.

Put simply, far from being an engine of growth after several years of contraction, investment in housing looks to be a drag on the economy in 2011.

“We continue to believe that this dip in housing will translate into a double dip on the overall U.S. economy, further rolling forward any stimulus-exit plans set by the Fed, and setting the stage for an announcement of QE3 in July,” said said Douglas Borthwick of Faros Trading. “Jobs and housing remain the focus for the Fed, and both areas continue to face severe difficulties.”

The problems lie not just with new homes. The overall picture is of a housing market slouching its way into a double-dip slump.

Sales of existing homes also fell last month, by a less precipitous 9.6 percent, down 2.8 percent from a year ago.

Prices of existing homes, unsurprisingly, are falling as well, down 0.3 percent in January nationwide, according to the FHFA, the third straight monthly fall.

The number of properties in foreclosure hit a record 2.2 million in January, according to Lender Processing Services, while something on the order of one-in-five homeowners with a mortgage are in negative equity, with mortgage debt exceeding the value of the house. In Florida 20 percent of dwellings stand empty, a statistic implying not just a few quarters of slump in building but several years.

This matters to the economy in two important ways. Firstly, housing activity, from building to buying to outfitting, is one of the prime drivers of the economic cycle. Secondly, if a slump is deep and protracted the bad debts it will produce will once again threaten to capsize the banking system.

NINE OUT OF ELEVEN IS NOT BAD

At a paper delivered at the central banking conference in Jackson Hole, Wyoming, in 2007 entitled “Housing IS the business cycle”, UCLA professor Edward Leamer argued that residential investment plays a key role in US recessions. He demonstrated that 8 out of 10 postwar recessions were foreshadowed by serious and sustained problems with housing, at least as of 2007.

Counting the most recent recession we can now call that 9 out of 11, with a good shot shortly at 10 out of 12.

“Of the components of GDP, residential investment offers by far the best early warning sign of an oncoming recession,” Leamer wrote.

“After a surge of building there has to be a time-out… before building can get back to normal, and before this channel through which monetary policy affects the real economy is operative again. The Fed can stimulate now, or later, but not both.”

Of course the Fed, as has been its way since the Greenspan era, has tried to eat the same cake repeatedly, but the recent run of data shows that the housing market is not responding.

Efforts at foreclosure mitigation have been a failure as well, with a small success rate and a high probability of re-default.

You could argue that efforts to prop up the housing market, from loan modification to tax incentives, have only served to lengthen the time that the fall of house prices takes, prolonging at the same time the “time-out” in construction and allied activity.

It will also be interesting to see just how well the banking system weathers a second fall in house prices. Much of their portfolios of loans and loan-derived securities are being carried on bank books at what may turn out to be optimistic levels.

If another wave of defaults comes, the truth of cash flows may well expose those marks for the fantasies they are. In this light the U.S. Treasury Department’s decision this week to allow many large banks to raise or recommence dividends may prove to be a mistake.

To be sure, U.S. manufacturing is doing well, and demand from emerging markets, particularly for natural resources and other commodities, will help to counteract the drag that housing will have on the economy.

Perhaps the scariest aspect is this: another housing bailout is probably politically impossible. This time the chips really will fall where they may.

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.)

Comments
12 comments so far | RSS Comments RSS

If you can buy a house in detroit for $5000 what makes a house worth 150,000 somewhere elts? houses have been used to keep people slaves to there employers for to long, let the market burn that’s what I say.

Posted by Dave1968 | Report as abusive
 

Doug Borthwick, who you quote above seems like a reasonable man.

I’d argue though that for the time being at least, the Federal Reserve IS the economy. QE3 is baked in the cake.

Someday the Fed will have to stop throwing liquidity into the markets. Then what? Yikes!

Posted by Missinginaction | Report as abusive
 

if our economy revolves around ponzy housing schemes than perhaps its a reality check to change from economy that lives off random speculative bubbles.

Posted by cv91335 | Report as abusive
 

The recent recession was caused by spurious housing valuations, even more criminal credit checks and decisions by everyone from storefront payday lenders to Goldman Sachs hustlers.

The commodity could have been Buicks for all that mattered. Or newspapers that haven’t yet figured out the Web.

Posted by Eideard | Report as abusive
 

The housing market is unstable because people can’t afford homes based on their incomes at today’s prices.

The ugly reality is that when anyone who wants a house, has the income to afford a house, then the relatively “limited” housing supply will run out! How do I figure that? Well, according to sources across the Internet, Answers.com seems to be correct in stating:

“According to the National Association of Realtors, there are approximately 130,873,000 total housing units in the U.S. in 2010.”

Do the math. There are around 96 million single working adults in the United States. There are around 74 million single family households.

Therefore, 170 million people would very likely wish to invest in a single family home!

That leaves a shortage of housing units (drumroll please) to the tune of 39 million single family houses!

Consider, then, the BILLIONS of working adults in China, India, and so-called “third world” countries. China alone is wallowing in pollution and contaminated water; a great many Chinese families are preparing for the day when they can come to the United States.

Conclusion: In a scenario where 170 million American citizens who wants a home, can afford one, there is a shortage of 39 million houses. In other words, to get someone to leave a dwelling they need for the rest of their lives, the 39 million adults without a home must “up the ante” and bid-up prices. Adding to their misery is a sudden flux of Chinese, Indians, and other foreigners whom, with competing job skills in computer sciences, medicine and so forth, will qualify for work visas. There is no law they can’t buy homes, and are willing to spend an ungodly percentage of their incomes to do so!

The United States is therefore likened to a cruise ship where so many people are clammoring to climb aboard, the ship begins keeling to one side from the sheer volume of bodies. A flux in the tens of millions of highly educated and skilled intellectuals from China, India and other countries would throw housing into a hyperinflation. People forget housing is NOT an unlimited commodity like little pieces of foreign-made plastic junk sold at Walmart stores! Houses occupy land, and land in desirable geographic regions is finite. It’s a cold equation, friends. This housing anomaly is just that, an anomaly, and those who don’t own title to finite land because they imagine it’s in fact infinite, are playing with fire. They could end up permanently cut-off from owning a house on land they hold title to.

Posted by DisgustedReader | Report as abusive
 

With the GOP keen to kill Fannie and the home interest deduction for middle class buyers, this is a lousy time to plow money into residential Real Estate.

Posted by SanPa | Report as abusive
 

The problem is caused by the average American just not earning enough to buy a house. Although the Government has been feeding huge amounts of money into the economy most of it is ending up in the hands of the very rich. Note the number of millionaires/billionaires increasing whilst most are taking pay cuts.
As the Government stimulus money will mostly be paid for by low income earners the situation will get worse.
The US Gini coefficient is now on par with Mexico and getting worse whilst Mexico is improving.
If this trend continues 20 years from now it will be American illegals slipping over the border to Mexico for a better life.

Posted by Sinbad1 | Report as abusive
 

The narrow minded ideology of un-regulated capitalism, corruption, and downright stupidity are responsible for the almost financial collapse. Real estate brokers, banks, and mortgage companies knew 27% of those that got sub-prime mortgages would default, 33% of the sub primes were flippers, and 9% of home buyers were given sub primes even though they qualified for conventional loans.
Wall Street had sent the word down: “sign em up.” As long as they could sell the mortgages up, the above mentioned absolved themselves of responsibility.
At the same time developers/home builders were pressuring appraisers to increase the appraisal values for the homes, a lot of them complied. In the hot housing markets of S.NV, S. CA, Phx. AZ, FL. and some other area’s, housing prices increased from 70 to 100%.
There were no complaints from local, state and federal officials because they all benefited by higher property taxes.

When all these mortgage3 packages reached Wall St., they were chopped up an packaged, taken to the rating agencies-Moody’s, Standard and Poors, and Fitch’s where they were given a rating of low risk, when in fact they were very high risk.
These packages were sold around the world to sovereign wealth funds, pension funds, local governments, school districts, etc.. Some investors who bought these instruments had to take out insurance payable to the seller.
The Wall Streeters took out informal insurance (Credit Default Swaps)to protect themselves, knowing these packages were high risk.
When they realized the market was about to crumble these financial giants short sold their own instruments and collected from the short sales, private insurance, and CDS. In reality, it is they who burst the bubble.
The almost financial collapse bailout of $700,000,000,000 has turned into approximately $15,000,000,000,000 which includes guarantees.

The government would have been better off if they had purchased a large percentage of the homeowner’s mortgage thereby establishing a floor for the housing market. The money would gave went up the economic food chain and there would not have been so much economic pain among the consumers–foreclosures, loss of jobs, closing of businesses because they could not get loans.
Those who have been foreclosed upon, now have bad credit and no longer qualify for loans. Those who lost their homes through no fault of their own should be given amnesty, so they can once again become buyers.

All the economic help has been directed to those at the top of the economic food chain and not to those that really needed help.

Then homeowners have to deal with government mortgage modification programs that have helped very few home owners. banks and mortgage companies have committed fraud in mortgage modifications and foreclosures, and the problem continues.

With all the money loaned and the guarantees to the corporate business world, the government could have bought all those underwater home mortgages and our economy would have roared back to life.

The Wall Streeters and others at the top consider themselves the “best and brightest.”

They are not!

Posted by ghostcommander | Report as abusive
 

Many American retirees are already legally slipping over the Mexican border for a better life. Canada is out of the question for most American retirees because the American dollar doesn’t go far enough there.

Posted by breezinthru | Report as abusive
 

The housing prices are still being propped up, else by far the majority of those with mortgages would be underwater. Even though housing prices have come down somewhat, they are still not realistically priced given the run-up during the Bush years, which was base purely on speculation, over-appraising the values to bump up the mortgage amounts and the heady re-packaging of mortgage backed securities to make the Wall Street merry-go-round generate billions of dollars for its investors. No one wants to take the hit on halving the value of their real estate, not the bank, not the home-owner, who will end up owing way more than the house will be worth for then next ten years and maybe longer, and not the city, county or state he/she lives in, because so much of their income is derived from property taxes. If we value the house at its true market value, basically erasing the last ten years, the whole system would crumble. So instead they will hold the houses, still marking their inflated value on their books as long as they can, hoping the market will come back up just like the stock market has, which I believe is purely the big guns throwing their weight around. There’s very little real growth in this country, with prices being so high and the big business giants cutting quality and costs to shut out the entrepreneur. Unless we get some real business growth in manufacturing and industrial besides weapons (I don’t think we can just be a nation of weapons and pizza parlors), we’re sunk. Depending on the housing market and healthcare for GDP is not an indication of a healthy society. Sad time for America. Same thing happened in Japan twenty years ago and they held on for years and are still recovering. Hope we don’t quit putting money into safety for things like nuclear reactors. Penny wise and pound foolish.

Posted by lhathaway | Report as abusive
 

I think that the housing market finds itself with too many Dodge sedans like Chrysler did in the 1970s. The wild building of speculation homes of the cookie cutter type are there and will just sit there and rot. I think most of these homes are not energy efficient, are poorly designed for the new smaller families, and are too big, and the construction was pretty shoddy. Some will have to be bulldozed or rebuilt and some will just go away on their own.

Posted by fred5407 | Report as abusive
 

Mr Saft cautiously says “If housing is the primary force…”, housing is, in fact THE “prime drivers of the economic cycle”. As such, I have no illusions that we are not setting up conditions for a double dip. Not just in housing, but for a long chain of co-dependent economic sectors.
My confidence comes from a long and continuing series of policy mistakes propagated by our government’s policy choices. It does not have to be this way.
In our recent past when Reagan gave the S&L industry a blank check, the fallout was later dealt with by the Resolution Trust Corp. A “rip-the-band-aid-off” solution rarely mentioned today. Why? Well, it acknowledged financial indstry insolvency!
Today, the government is dictated to by the very industries that caused the crisis. That industry advocates hyper-inflation as a cover for their insolvency. You gotta admit that it is working out pretty good for them, in the short run.
However, even a super-accommodating Federal Reserve is pushing on a string. So much for monetary policy solutions.
Over in the Congress we have promises not to stimulate via fiscal policies. This is a “too big of a deficit already” mantra that locks in 1930’s style outcomes.
The upshot of this policy quagmire is that tax revenue has tanked, unemployment statistics are gerrymandered, interest rates are less than inflation, housing will continue it’s collapse and growth is going down the stagflation road again.
When we hire a Supreme Court willing to give corporations citizen status and leaders who only get re-elected by pandering to the powerful we get the kind of government we deserve.

Posted by MediocreFred | Report as abusive
 

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