Housing Dips Again
Amidst all the hullabaloo over health care reform the economy chugs along largely unchanged from when we last saw it. Today’s news that sales of existing homes dropped again, for the third straight month, should cause us to reflect on just how fragile our incipient recovery remains.
The February data shows sales at an annual rate of 5.02 million, down 0.6% from January, and the lowest for eight months. Most of last year’s gain has now been lost and we are approaching all time lows for activity. Most of the decline was centered in the usual areas: the West and South, while the Northeast actually experienced a gain.
The median price of the homes sold was $165,100, a drop of 1.8% compared with a year earlier.
Lastly: the inventory of unsold homes rose 312,000 to 3.59 million, which was a much larger jump than usual for February and brings the inventory overhang to 8.2 months, the largest since last August.
What does all this mean?
Obviously real estate is still mired in its post-bubble hangover, and we are yet to find the firm footing necessary for full recovery. There is anecdotal evidence that prices are still too high to re-ignite strong activity – there are complaints in Southern California about a dearth of sub $500,000 homes, which suggests that we overbuilt expensive homes and that the inventory for sale does not match the price range within which people are now looking to buy. To get the market to clear something has to give, and with wages stuck and credit tight, most of that movement will have to come in the form of further price reductions.
The tax credit for first time buyers has been extended but is seemingly having far less impact than it did in its first incarnation. This tells me that the backlog of demand that existed last year has been exhausted and that further efforts at stimulus of real estate will have little impact.
The decline of real estate is a massively distorting factor in our economy – just as the absurdity of the bubble itself was. The deflationary drag of the persistent weakness in housing shows up throughout the data. The Consumer Price Index, for instance, is heavily influenced by housing, which is given a weighting of 40% in the overall index. Clearly the post-bubble malaise is a major factor in keeping inflation low at present. Indeed if we look at inflation without housing it is around 3% a year; add housing back and it drops to near zero. The implication is that housing is still suffering outright deflation and thus is accumulating problems rather than resolving them.
This deflation has widespread effect. Not only does it reduce wealth through lost home value, but in eliminates the prospect for price appreciation over the medium term – housing is not a good investment at the moment. Clearly there will be localized exceptions to this, but for the country as a whole the days of wealth accumulation through home ownership are over. This is a hammer blow to the middle class and has enormous knock on effects. It forces us to save elsewhere for retirement and those big expenses like college tuition. This limits our ability to spend what we earn and thus will reduce GDP growth. It makes renting much more attractive and will have a long term impact on the supply of rental property. And, obviously, it presents a devastating blow to anyone trying to re-finance a home. The number of homes with negative equity has risen to an all time high and continues to rise. It also represents a massively destabilizing potential for the economy: eventually those losses have to be realized, which will reduce the purchasing power available within the economy for years to come.
The key to remember is that this lost wealth is permanent. Even if prices rise strongly again, which I currently doubt, we will have lost the demand of the last two or three years for ever. That is a very heavy burden to pay for the wild and irrational excesses of the mid 2000’s, and will have a lifetime long impact on hundreds of thousands of households. All the stimulus and all the market recovery in the world cannot recapture or offset the losses we have sustained through our obsession with real estate.
Today’s news tells us that market is still contracting and likely will remain weak for months, if not years. It will thus act as a drag on overall activity.
This is yet another reminder that we are not going to experience a rapid, sharp recovery. Indeed if real estate stays in the doldrums much longer it adds to the risk that we will not be able to sustain much growth at all.
Having said all that, we should see some sort of growth in sales as the warmer weather sets in, and the usual Spring burst in activity gets underway. Hopefully this will allow us to find that firm footing we need. Put that another way: if we don’t see the normal seasonal uptick, we can pencil in a double dip recession for later this year!
