Do New Housing Stats Foretell Trouble? genre: Econ-Recon & Six Degrees of Speculation
The latest statistics on the housing industry suggest a dangerous turn of events that may have significant implications for the U.S. economy. I've long been concerned that recent economic strength has been predicated upon the implementation of a period of artificially low interest rates and an acceleration of adjustable rate and interest only mortgages. While the Federal Reserve may have succeeded in reducing the depth of the last recessionary period through the manipulation of interest rates, it may have simply been a period of deficit spending by both the government and the average homeowner.
If the housing industry suffers a significant setback, I would expect to see a huge increase in foreclosures and possibly bankruptcies...a set of circumstances that would send the economy into an even deeper recession at a time when the government is adding debt at an alarming and unprecedented rate. Read the full New York Times article here.
The National Association of Realtors reported today that purchases fell 4.1 percent last month to an annual rate of 6.3 million homes, the slowest since late 2003. The rate was 11.2 percent higher a year earlier.
At the same time, the inventory of unsold homes on the market swelled to a 7.3-month supply, the most in more than a decade.
The national median price of a sold home held steady in July at $230,000. But the association said that prices fell in most areas of the country, and in many places are now lower than a year earlier.
Adding to my concerns is the recent phenomenon that allows homeowners to borrow not only the full value of their home but in many cases up to 125% of the value. Allowing such borrowing positions many homeowners for disaster should housing prices fall...especially if they have adjustable rate mortgages or find themselves in a situation that they need to sell their home. The possible domino effect of such a situation is staggering.
When combined with other recent statistics showing falling real estate investment and fewer application for building permits, the sales figures today make clear that a housing slowdown is now under way. Most economists, including Federal Reserve chairman Ben S. Bernanke, still expect the slowdown to be orderly. But it remains to be seen just how far home sales will slide in the coming months and what the impact on the economy will be.
Economic expansion in the second quarter slowed to a 2.5 percent annual rate, down from 5.6 percent in the first quarter. Because housing has been so central to the overall health of the nation’s economy in recent years, forecasters are concerned that a steep decline in home sales may help push the economy into a recession.
Despite predictions that the slowdown will be manageable, it isn't difficult to imagine circumstances that could create a period of deflation. There are few recent historical comparisons where we have seen an economy fueled largely by equity borrowing amidst the lowest interest rates in decades. As such, it seems highly speculative to predict the impact of a housing bust following such a convergence of favorably manipulated events. There is little doubt that much of the recent economic success has been fueled by record equity borrowing and consumer debt.
The margin of error...or the ability of consumers to withstand a slowdown...has been cut quite thin by this administrations economic policy. At the same time, the country continues to see record deficits and should we fail to sustain reasonable economic growth (GDP increases), we may well see accelerated debt accompanied by declining revenues...a perfect storm for recession as well as deflation.
Daniel DiRito | August 23, 2006 | 8:30 PM
Comments
1 On November 15, 2013 at 12:50 PM, Forex Strategy Master Review wrote —
Quite educational look onward to coming back again.
2 On November 15, 2013 at 12:50 PM, Forex Strategy Master Review wrote —
Quite educational look onward to coming back again.
Trackback Pings
© Copyright 2024
Post a comment