Predicted Slowdown in Housing Arrives
The housing boom has finally come to a halt as the interest rates rise and the number of prospective buyers dwindle and they refuse to pay the listed price.
In the latest and strongest indication that the home buying and selling frenzy is over, the National Association of Realtors reported yesterday that sales of previously owned homes fell to the lowest level in July in more than two years, prices flattened and sellers waited longer and longer to find buyers for their homes. The supply of unsold houses on the market hit a record high.
Although some continue to say that this is an orderly slowdown, signs indicate that the optimism might be misplaced.
“Certainly, the housing market is undergoing a measurable adjustment,” Lawrence Yun, senior economist with the Realtor association, said. “It’s a continuing cooling trend.”
The number of unsold homes on the market reached a record for the second consecutive month. There are now enough homes available that it would take 7.3 months to sell them all if the current selling rate held.
The bloated inventory levels, Mr. Yun said, indicate “a very sudden change which I have never seen before.”
Sure, I say, this is just like earlier slowdowns.
The real problem comes in California where Mr. Greenspan convinced huge numbers of people to take out ARM loans so they could buy their "dream home." Last year before the market cooled, I heard that in California, 25% of the new home mortgages being written were for interest only loans and those mortgages are going to come due in a market where there will be no buyers to buy those overpriced homes. And as another sign this change will not be good is during the second quarter, foreclosures in California rose by 67%.
When the housing bubble breaks, what's left to pickup the pieces? Oh, that's right, we do have a number of openings in the military. Or perhaps, the unemployed construction workers can get picked up to help build the border fence. (And such a deal that is, only $1.829 Billion is needed to build a fence to protect our borders. That should help keep a quite a few construction workers gainfully employed unless Kellogg-Brown gets the contract.)
Update: Dave Johnson has more on why this is a true bubble: people buy when they think it is a good deal. Expectations have changed and they are running to the hills.
[Update 2: Atrios linked Barry Ritholtz who has another piece that shows why the housing market has some very worrying connections.]
Also, Atrios linked Noriel Roubini's piece which is an absolute stunner.
So, the simple conclusion from the analysis above is that this is indeed the biggest housing slump in the last four or five decades: every housing indictor is in free fall, including now housing prices. By itself this slump is enough to trigger a US recession: its effects on real residential investment, wealth and consumption, and employment will be more severe than the tech bust that triggered the 2001 recession. And on top of the housing bust, US consumers are facing oil above $70, the delayed effects of rising Fed Fund and long term rates, falling real wages, negative savings, high debt ratios and higher and higher debt servicing ratios. This is the tipping point for the US consumer and the effects will be ugly. Expect the great recession of 2007 to be much nastier, deeper and more protracted than the 2001 recession.
So while Bush is telling Republican candidates to run on the great economy the Bush policy created, experts are arguing about whether it is the worst housing market in 40 years or more than 50 years. Bubble-boy hasn't ever grokked that a bubble housing market isn't a good economic indicator.
In the extended entry I add a brief synopsis of why Roubini sees such deep trouble from the housing market bust.
Roubini provides main 3 points which he believes say why this bubble is more serious than the .com bubble.
- The impact on demand for residential investment is as great as the impact of the tech-market stock was on demand for real investment in 2000-2001. This will dry up residential investment for a long time.
- The "wealth effect" (aka, people feeling rich because their investment was doing really well) is much more pernicious this time because it covers a much broader population. The number of people that participated heavily in the stock market as still a fairly elite set of people. Everyone who owns a home in the United States could be effected by the bursting housing bubble. And because so many of the loans were ARMS, with rising interest rates, people are going to be impacted by the increased debt servicing on those loans.
- And as we saw, the "wealth effect" largely drove the economy for a few years. People believing they were doing pretty well, took out equity loans to buy things or to swap up their homes. As people feel less wealthy, they will stop buying and this will lead to a lot of jobs disappearing.
The direct effects are job lost in construction, building materials, real estate brokers and sales agents, and employees of the mortgage finance industry. The indirect effects imply that the role of housing is even larger than 30%. The housing boom led to a boom in consumer durables spending on home appliances and furniture.
So what else does he see?
He sees a housing glut with lots of price adjustment before it comes back. He sees many, many jobs disappearing because over 30% of the jobs that have been created under the Bush economy have been driven by the housing market. He believes that there will be a number of people who won't be able to service the debt that they've taken out on their homes. He finds it ominous that the futures markets are betting that housing prices will fall through 2007. And he says that the problem is bigger than the US.
If this all comes true, the 2008 elections will be very toxic indeed.