Yesterday morning, the National Association of Realtors
reported
a 27% drop in existing home sales for July (as compared to June),
the largest month-over-month drop in 15 years. At sales that pace,
given the number of houses on the market, existing home inventory
jumped up to 3.98 million existing homes for sale, a 12.5 month
supply of housing (i.e. if all houses currently on the market were
purchased at the rate that houses traded hands last month, it would
take just over a year to sell them all), the highest inventory by
this form of measure in more than a decade. According to NAR, “Raw
unsold inventory is still 12.9 percent below the record of 4.58
million in July 2008.”
The report was much worse than economists predicted, with
Bloomberg’s median estimate (among the 74 economists asked for a
prediction) being an annualized selling rate of 4.65 million homes
versus an actual report of 3.83 million (again, an annualized
number).
Prices were down 0.2% from the prior month but up 0.7%
from a year earlier, showing perhaps that housing prices must fall
further in order to get buyers interested.
It’s not all about price, however, when it comes to
housing. Two perhaps larger factors are employment and availability
of mortgages, both of which are disastrously weak for what should
be a point of recovery in a typical economic cycle.
Much demand for existing houses comes from people moving
to a new location to go to a new job. With unemployment stuck near
10% and underemployment (including unemployment) near 17%, with
entrepreneurs, particularly those who would normally consider
starting up a small business, pinned to the sidelines by
uncertainty about what Obama and Pelosi’s next business-crushing
shoe to drop will be (taxes? cap-and-trade? protectionist
legislation?), the chances of job creation improvement in any
single digit number of months is bleak. As the
L.A. Times notes:
…the nation’s tiniest companies had fewer new hires last
month than any time since October. The data are further evidence of
a trend that has had many economists worried for months and
intensifies concerns that smaller firms may not be robust enough to
help lead the country out of its financial slump. The slowdown in
hiring is particularly troublesome, experts say, because small
businesses typically hire first during a recovery. A reluctance by
little companies to add positions could mean that the big firms,
which typically lag behind, will add jobs even more
gradually.
(For more on this topic, I recommend this fascinating
study by the Kauffman Foundation: “The
Importance of Startups in Job Creation and Job Destruction”
which notes that “startups aren’t everything when it comes to job
growth. They’re the only thing.”)
With no new jobs, people are staying put. Unless you’re
simply outgrowing your current home by having kids (or having your
mother-in-law move in), a house would have to get a lot cheaper to
get you to move if you don’t actually have any need to.
Then, even if you did want to move, you’d have to be able
to get a mortgage. While mortgage rates have reached record lows in
recent days, it’s harder than ever to get a mortgage. Several years
ago, a ham sandwich could get a 100% loan-to-value mortgage by just
claiming a decent income in mayonnaise. Heck, it could even have
been an illegal alien ham sandwich as long as he could show the
right bar code for a jar of Hellmann’s. Now, you have to have
near-perfect credit, a high income, and the ability to put down a
substantial down payment to be able to get even a conventional
government-guaranteed mortgage, much less a “jumbo” mortgage needed
for most loans over $417,000 in most parts of the country (the
conventional limits are higher in certain high-cost
areas.)
In a typical example of government shutting the barn door
after the horse has left — actually a few years after it’s left in
this case — even the FHA is raising its lending standards,
although calling requiring a 3.5% down payment a “standard” would
be laugh-out-loud funny if those sorts of Barney Frank- and Chris
Dodd- mandated levels hadn’t cost the rest of us our jobs, our home
values, and our retirement savings.
Between a lack of new jobs, a lack of available credit,
and the tremendous uncertainty regarding how the newly established
Consumer Financial Protection Bureau will punish lenders not only
for mortgage failures which they contributed to, but also for
failures entirely of the borrowers, it’s hard to see how the
housing market improves anytime soon.
As with the failed “cash for clunkers,” the Obama
Administration’s actions have served only to shift demand between
time periods, with their recently expired homebuyer tax credit
briefly lifting sales only to give us this record plunge when the
credit expired.
A rising housing market was critical fuel for the economic
boom of the last decade, not least due to irresponsible homeowners
using their homes like piggy banks, borrowing against their equity
(which they no longer have) and spending the money on cars, trips,
and perhaps most dangerously, on real estate speculation. That
speculation caused rising prices which created a self-reinforcing
game of real estate musical chairs that people with no experience,
no investing talent, and no goal other than not to miss the money
train all wanted to play. As is typical of bubbles, it turned out
there was a lot more than one chair missing when the music
stopped.
But even without such recklessness, and even treating the
“wealth effect” as of minimal importance, a second dip in housing
could point to problems not just for the broad economy but also for
local budgets — not least school districts — whose finances are
heavily dependent on property taxes. A 2009 paper on “House Prices
and Economic Growth” by Norman Miller of the University of
Cincinnati and Liang Peng of the University of Colorado concludes
that “house price changes have significant effects on Gross
Metropolitan Product growth…[and that] the effects last for eight
quarters.”
Furthermore, as the
Federal Reserve Bank of San Francisco notes, much spending in
recent years, and not just in America, was done with borrowed money
that now must be repaid rather than spent or saved in an
economically constructive way. Therefore,
Going forward, the efforts of households in many countries
to reduce their elevated debt loads via increased saving could
result in sluggish recoveries of consumer spending. Higher saving
rates and correspondingly lower rates of domestic consumption
growth would mean that a larger share of GDP growth would need to
come from business investment, net exports, or government spending.
Debt reduction might also be accomplished via various forms of
default, such as real estate short sales, foreclosures, and
bankruptcies. But such deleveraging involves significant costs for
consumers, including tax liabilities on forgiven debt, legal fees,
and lower credit scores.
It’s not a pretty picture and it explains a lot about why
10-year Treasury Note yields this week hit an all time low of 2.5%,
predicting an extended period of economic malaise. Like Jimmy
Carter, our current president is presiding over a crisis of
confidence, and as during the Carter presidency much of that crisis
is due to a steadily declining confidence in the president
himself.
The bursting of an asset bubble, especially one that so
many people are involved with not just economically but also
emotionally, is a painful but necessary experience. It’s worse than
the hangover after a party because if you find a cure for a
hangover, the cure probably doesn’t have too many bad side effects.
Unfortunately, the government’s efforts to minimize the pain of the
bubble bursting — because it fears the political fallout — are,
and only can be, the economic equivalent of the hair of the dog,
namely trying to throw some duct tape on the bubble and pumping it
back up again, if not to its full countrywide (and Countrywide)
scale then at least to something that causes housing prices to stay
steady when they would, in an unmanipulated and un-bailed-out
market, be falling.
As little fun as it is, there should be a hushed but real
enthusiasm for ending of decades of government pushing home
ownership as a way to endear voters to the political party that
best sells itself as the one making sure you own something you
can’t really afford. It’s no more rational to say that everyone
should own a home than that everyone should own a yacht or a
Tibetan Mastiff (one of which sold last year for much more than
the price of the average home in America). Remember, when a
politician wants you to own a house, he does so because he thinks
it’s good for him.
In the long run, the only way for housing, like any other
market, to return to health, is for the bubble to be allowed to
collapse, to allow market forces to do what they do whether it
feels good or not on a given day. Housing, like the rest of the
economy, faces an additional unnecessary headwind in our current
Administration whose disdain for and lack of understanding of the
economic freedom — including freedom to fail — necessary for
economic growth and prosperity simply add to potential homebuyers’
hesitancy and confusion.
