Yesterday's existing home data was ugly. It was coyote ugly. It was so bad that forecasters would probably be willing to chew off a foot to be able to get out from under their predictions. Yesterday's data indicated that the pace of existing home sales, a seasonally adjusted annual rate of 3.83 million. Many expected the pace of home sales to decline now that the home buyer stimulus programs have expired, but the decline reported yesterday indicates the real estate market is severely impaired. A glut of homes, more restrictive lending standards and a poor job market are conspiring to keep the housing market in an impaired state. The following appeared in the Wall Street Journal (here):
"I'm in no rush," said Steve Hamilton, who sold his Carlsbad, Calif., home two years ago and has been on the sidelines since. He said he was happy to continue renting a home that costs half of what the monthly mortgage payments were just a few years ago. "The tide is still going out," said the 41-year-old commercial-real-estate investor. "When I see a steady increase in local jobs, that's when we'll step back into the market."
This is another blow to those who say that consumers are not needed to lead us back. The problem is that the economy has become overly reliant on an ever stronger housing market. While increased productivity helped keep prices down, it also helped keep wage growth down. Consumers became more dependent on using home equity to fuel spending. That unsustainable part has ended. The recovery has basically stalled. I am still not in the double dip camp, but there is no denying the fact that a v-shaped recovery is not in the card. We may be lucky to see 2.00% growth and that is not enough to be of much help to the job market.
Inflation should not be a problem, but treasury yields may be over done, unless a second deep recession does occur. Some people are of the opinion that we could see stagflation and higher rates as confidence in the dollar wanes. Although that is possible, there is another piece of the equation which must be considered.
There has to be a destination for the displaced investment capital. Where is the capital going to go? To Europe? Not likely as its problems may be worse than those of the U.S. China? See what happens when you want to move the renminbi out of China. Nope, capital will stay in the dollar for now and slowly we will move forward, but a double dip is a distinct possibility.
Disclosure: No positions