Housing raises US recession alert
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.)