When I saw the headline last week, “Housing Recovery Stalls,” my first reaction was to kick myself for having missed yet another milestone in the U.S. economy’s long rehabilitation process.
Then I came to my senses. What housing recovery? If there is, or was, one, it is nowhere to be found in the data. Homebuilder sentiment, new home sales and single-family housing starts, which, in that order, lead the complex of residential real estate indicators, are bumping along the bottom. There was no recovery to stall.
There was a brief incentive-driven pick-up in sales in 2009 and the first half of 2010 that faded the minute the home purchase tax credit expired.
As it turns out, the “recovery” referred to in the headline was in house prices, which rebounded modestly when sales improved. The “stall” was their renewed slide, based on the S&P Case-Shiller Home Price Index. Prices fell in all 20 metropolitan statistical areas in October compared with September, according to the Case-Shiller report.
And not a moment too soon. Unless there’s a spontaneous surge in housing demand, prices will have to fall to allocate the bloated inventory of unsold homes.
Various government initiatives, including the first-time homebuyer tax credit, have distorted the market and delayed the inevitable. The law of supply and demand is one of the inviolable rules of microeconomics. Given the tendency of many macroeconomists to forget the basics, a brief review is in order.
Less Is More
The demand curve is downward sloping. What that means is demand for any good or service isn’t fixed. It depends on the price. A $1,000 cashmere sweater will find a lot more takers when it’s marked down to $500 in a post-Christmas sale. In general, the lower the price, the greater the quantity demanded.
Producers respond in the opposite manner. Higher prices are an incentive to provide more of a good or service, which is why the supply curve is upward sloping.
The point at which consumers wish to buy what producers want to sell is called the equilibrium price, which isn’t fixed and responds to changes in market conditions, technology, the population, incomes or the prices of other goods and services. These forces cause shifts in the demand or supply curves, producing a new equilibrium price.
The U.S. just experienced the biggest speculative boom/bust in housing in history, a massive outward shift in the supply curve. Anyone expecting home prices to rise in the face of a glut of unsold homes is counting on either an act of God to destroy huge swaths of the housing stock (a shift back in the supply curve) or an influx of new immigrants needing shelter (a shift out in the demand curve.) Neither is likely, although acts of God are notoriously hard to predict.
The inventory of existing homes stood at 3.71 million in November, about where it was four years ago, according to the National Association of Realtors. Add to it the 197,000 new homes for sale and anemic demand, and the unavoidable conclusion is that home prices need to fall further to attract buyers.
It would take 16 months to deplete the inventory at October’s sales pace, according to CoreLogic, a real-estate research firm in Santa Ana, California. (CoreLogic uses its own sales data, collected from 2,000 county recorders across the country, instead of the NAR’s statistics on home purchases.)
“Previously when the months’ supply was that high, home prices were falling at a 10 to 15 percent annual rate,” said Sam Khater, senior economist at CoreLogic. “If it remains that high, that’s where prices are headed.”
If the visible supply is depressing current prices, the shadow inventory, or properties that are seriously delinquent, in foreclosure or owned by lenders, will be a drag on future prices, Khater said in a telephone interview. The shadow supply, which was eight months in October, is being constrained by foreclosure moratoriums in various parts of the country while the government investigates shoddy paperwork by lenders.
Short of a spontaneous burst in housing demand, which seems unlikely, there is no way to reduce the supply of homes for sale -- for the market to clear -- without price declines. (Think cashmere sweater sale.) The sooner that happens, the better.
In the meantime, the U.S. economy will have to recover without help from housing, which, along with manufacturing, is one of the business cycle’s traditional leaders. These two interest-rate-sensitive sectors account for five of the 10 components of the Index of Leading Economic Indicators: building permits; the manufacturing workweek; manufacturers’ new orders for capital goods and consumer goods; and supplier deliveries.
The LEI rose 1.1 percent in November, with nine of the 10 components showing an increase, according to the Conference Board.
The one outlier? Building permits. Enough said.
(Caroline Baum, author of “Just What I Said,” is a Bloomberg News columnist. The opinions expressed are her own.)
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