Chris Low, chief economist of FTN financial recently said:
[A] stable housing market is essential to a stable banking system, and he believes “everything that can go wrong in the housing market already has.”
I would disagree. One of the things that housing can still suffer from is attrition. Some problems get worse over time.
One of the factors that can wear over time for housing is employment. There is no such thing as a "jobless recovery"
With the unemployment rate at 10.2%, the stock market might take some comfort in the thought that we are closer to the peak in the unemployment than the trough. Unfortunately, we are likely a lot closer to the beginning of a long, jobless recovery than the end.
If 200,000 jobs could be added monthly to nonfarm payrolls starting in November (and that will not happen in November), we would recover all of the jobs lost so far in the Great Recession sometime around April 2013.
Unemployed people don’t buy houses. Underemployed people don’t buy houses. People who are worried about their jobs don’t buy houses. [Unless they are downsizing.]
One need only look at a number of widely accepted measures of economic health. While nearly one of six American workers is unemployed or underemployed, almost a third of our productive facilities stand idle. While homelessness continues to grow, nearly one in seven rental properties stands vacant and foreclosure rates rise.
Put aside Economics 101 and ask a simple question. Isn’t there something wrong with an economy that fails to steer unemployed workers into the unused plants? And if some policy achieved this purpose, wouldn’t more workers earn enough to rent those vacant homes and apartments?
Americans often pride themselves on looking at facts on the ground. I find it hard to deny that as an economy we have already produced enough homes and factories that everyone could live comfortably.
Buell is right in that there is something wrong with the economy and there are enough houses out there. Policies that encourage more home building aren’t going to stabilize housing or the economy.
When employment has recovered, housing will begin to recover. Since there is an overabundance of houses, building more of them won’t help the economy stabilize. As Buell’s data shows, we have an unbalanced economy that is directing resources in the wrong places. Until the American economic machine produces what we need and quits overproducing what we don’t, there will be no stabilization.
Low is wrong. A lot more can go wrong with housing.
The point that Buell is perhaps hoping the reader will make is that we haven’t reached the market clearing price.
Market Clearing Prices are a fundamental concept that we all learned in Econ 101 (if we took it). It is the price at which buyers and sellers make an efficient market (maximum utilization of resources, but keep in mind “maximum” is not necessarily 100%).
There are 2 serious problems impeding this return to an efficient market.
1. Sticky prices. This concept is fairly well known and understood. It simply takes time for prices to adjust downward (they do so slower than upward)
2. Government intervention. The government has used a myriad of ways to “extend and pretend” in many ways, of which there are too many to list here without hijacking the thread.
As always said “There’s nothing price won’t fix”. Unfortunately, that’s deflation, and noone wants deflation… it’s the boogeyman; and he’s coming to get you.
Did you know that you can make money buying a house in the high desert and leaving it sit, claiming it as your primary residence while renting elsewhere? Yes, it’s true, if I spend 80K on a house and get an 8K stimulus, I can make payments for many years before having to pay the piper. There’s a lot of speculation here. Rampant.
Besides, think there’s no global deflation? Watch this and then answer than question:
http://www.youtube.com/watch?v=0h7V3Twb-Qk
Chuck Ponzi
Chuck-
I don’t see how we can get around deflation. I keep seeing a path that I don’t know how we can escape.
The only way to provide lasting employment for Americans, not “one-time stimulus stuff”, is for companies to make what Americans need. Sadly, we have exported those jobs overseas. To bring jobs home then, we need to be competitive. It’s tough to be competitive when we make $25/hr.+ benefits and the overseas competition makes $45/month.
Hey, I don’t want to make $45/month any more than the next guy, so I hope we can be competitive without matching dollar for dollar. That said, I don’t see how to get the economy back in balance without Americans accepting a huge cut in our standard of living.
We can’t keep borrowing overseas money to buy stuff from overseas. In the long run, it won’t work.
Twist and John,
The Housing Doom post on the Phoenix market a couple days back got a shout out at Clusterstock today! Great job and I expect your traffic will jump.
Del Mar, California CRE bloodbath in pictures.
twist (#3) -
Like GYSC says …
John, GYSC-
It’s nice to feel appreciated. : )
apparently the recovery just isn’t happening because appraisers are holding it up?
http://www.cnbc.com/id/33996852
i guess we should let them go back to just asking the lender what the appraisal “needs to be” and they can write down that number?
[A]lmost a third of our productive facilities stand idle.–John Buell
Since y2k (at the very least), the Fed has pursued a policy of artificially low interest rates. The result has been overinvestment in capital goods.
Factories are idle because the expected revenue stream anticipated by their owners (who were tricked into thinking there was a greater pool of savings than actually existed) never materialized.
These are not “productive” factories; they are mute testimony to capital misallocation brought on by loose monetary policy.
The problem is not actually the economy (which is only a metaphor for the voluntary exchange of goods and services). The banking cartel, as represented by the Federal Reserve and its member banks, is the problem.
I have been a real estate broker for 10+ years and a real estate financial analyst for 2+ years. The housing market is definitely not stabilizing. Prices will continue to decline for the next 2-4 years. I cover this in my blog http://www.HaltingForeclosures.com. The government stimulus programs (expanded FHA, tax credit, TARP, increased Fannie/Freddie/Ginnie mortgage purchases, etc.) are the entire real estate market with the result of artificially propping the housing market up now. Once the government runs out of money (it will happen soon) and as a result stops these housing and bank subsidies, and the next wave of foreclosures occurs (Option ARMs), the real estate market will decline rapidly again. This does not even factor in the commercial real estate collapse that is occurring right now. Personally, I believe that the spring of 2010 will be the last window of opportunity to sell real estate before the next decline. I will be selling my home and taking a cash position.