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.
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