Jan 25 2007
Housing Bottom in… uhhh… Maybe Not.
Despite all the talk through December about housing having bottomed, this just in:
Sales of existing homes fell in December, closing out a year in which demand for homes slumped by the largest amount in 24 years. The National Association of Realtors reported that sales of existing homes were down 0.8 percent last month, a bigger decline than had been expected. For the year, sales fell by 8.4 percent, the biggest annual decline since 1982, when existing home sales fell by 17.7 percent in the midst of a severe recession.
So housing will be sluggish…housing will be down. Housing is one component of a very broad multilevel economy. Most of the people who rely on housing (builders, mtge lenders, homeowners, down to the speculators that you so often cite) represent a finite piece of that pie.
My conclusion? Some think housing has bottomed, some think not yet, (and a very few think housing will prove to be our Achilles heel). It is highly unlikely that this segment of our economy will significantly mitigate the 3% real long term growth trendline.
IMO, it is too easy to dismiss this correction in housing as any other ordinary housing adjustment without considering the broader fundamentals and their implications. Since 2001 the expansion of credit that kept the economy from slipping into a very deep recession enabled this bubble to reach the stratosphere in some areas while supporting home values that were not otherwise supportable at higher interest rate mortgages. Moreover, you can’t discount the support home equity withdrawals contributed to basic economic numbers over the last five years. Goldman attributes 2.5% of the 4% GDP average 2002-2006 to HEWs. With that spigot turned off, we are now facing the consequences — only compounded by the over-extension factor.
As for the basic problem with economies that ramp up and grow dependent upon credit expansion to gin up the figures, consider a recent post of ours that leads off with the condo problems in D.C. and explains the deeper problems looming. As well, consider that the declining effectiveness of credit expansion (as an alternative to “old fashioned” savings and sacrifice) in being able to sustain GDP; it is rapidly declining. It was 1:1 (dollar fresh credit : GDP) back in the 1960s. Twenty years later the ratio dropped to 2:1. By the 1990s (a mere decade) 3:1 and 4:1 and now we are exceeding 7:1. Tis not sustainable, and that is the environment in which we are experiencing the current housing slowdown. This is unprecedented, and not the time for cavalier dismissals.