Can the USA economy really grab hold as long as the housing market remains weak? This past week, Fed Chairman Ben Bernanke at his press conference following the FOMC meeting acknowledged housing was the primary reason the current economic situation is muted.
My position is that:
- the personal wealth for the majority of Americans runs through home ownership. If your house declines in value, you hunker down to preserve wealth. In a consumer driven economy, a hunkered down consumer is not good news.
- falling home values have imprisoned many homeowners preventing moving for a better job (or a job period) or a cheaper place to live - Zillow reports over 28% of home mortgages are underwater.
- there is no underlying dynamic which points to a true "recovery" of housing prices.
Divide the housing crisis into two parts - sales volumes and prices. Home sales volumes have likely bottomed for existing homes.
Analysts and readers tend to get lost in the noise of month-to-month variations. Using yearly data, new home volumes seem like they are continuing to fall - but in fact, the data for the last six months are indicating new home sales are also bottoming (even though December's new home sales volumes were terrible - one month is not a trend).
Prices, on the other hand, do not seem to have found their feet yet - although the recent National Association of Realtors (NAR) data is showing some surprising strength in the last two months.
It boils down to a situation where maintaining volume appears to depend on prices falling. While backlog continues to fall (does not include shadow inventory), I am not convinced there is any metric which quantifies the number of homes which would come onto the market if home prices began to rise. Pundits' discussion on this topic is like watching a game of liars poker.
There may be years and years of pent up inventory which is not on the market due to homeowners' decisions not to sell at the current prices, and millions of foreclosures that are yet to be completed. But eventually realization will set in that depressed prices are the norm and the reluctant homeowners will accept the new reality. A large group which is on a short fuse is the boomers who have second homes and/or McMansions - and were counting on relocating to cheaper or warmer places, or just wanting to cash out for retirement.
Supply and demand dictate prices. I remain unconvinced that anything less than a housing shortage will drive prices up and put financial pressure on the potential homeowners to mutate to become actual homeowners. There are approximately 130 million residential housing units, with the household growth demanding around 1 million additional residential units needed per year (after subtracting new residence growth). Much of the net gain in housing units may be in rentals. One reason for this is that as many as seven million potential home buyers are out of the market right now because they can't qualify for financing with a recent foreclosure on their record. And, with as many as seven million more foreclosures possible in the coming several years also producing a similar decline in potential home buyers, one million new household formations per year are completely offset as home purchasers by a similar number of foreclosed former homeowners who will not qualify for new mortgages for many years.
So both supply overhang and disrupted demand weigh heavily on the prospects for a turn around in housing anytime soon.
The good news may be that homes are in a depression, as well as many other sectors of the economy. How much more can one hunker down when one is already hunkered down? With the current global slowdown beginning, the already hunkered down USA economy might well be a net strength for the country.
Economic News this Week:
The Econintersect economic forecast for January 2012 continues to predict slowly improving economic growth.
ECRI has called a recession. Their data looks ahead 6 months and the bottom line for them is that a recession is a certainty. The size and depth is unknown but the recession was to hit before the end of 1Q2012. Econintersect's January forecast is not recessionary (one month look-ahead). This week ECRI's WLI index value was -6.5 - a negative value but the best index value since September 2011. This is the second week of index value improvement. This index is indicating the economy six months from today will be weaker.
Initial unemployment claims rose 21,000 to 377,000 following last weeks revised 46,000 massive fall. Historically, claims exceeding 400,000 per week usually occur when employment gains are less than the workforce growth, resulting in an increasing unemployment rate (background here and here). The real gauge - the 4 week moving average - fell slightly to 377,500. Because of the noise (week-to-week movements from abnormal events), the 4-week average remains the reliable gauge.
Overall the data this week continued to confirm an improving economy. The data releases seem to go in waves - good weeks, less good weeks. Last week was mixed. The data released this week which contains economically intuitive components (forward looking) was strongly positive. GDP was particularly disappointing, not because of the 2.8% - but the strong components of the 2.8% will not be sustainable into 2012. To view the scorecard below with active hyperlinks - click here.
Bankruptcy this Week: Privately-held Fountain Powerboat Industries, Ener1
Bank Failures this Week:
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.