Be Your Own Economist ®

Today’s San Francisco Chronicle carried this Associated Press story with Alan Zibel’s by-line: “Traders bet home prices will drop – recession predicted.” Here are the lead paragraphs.

“U.S. home prices have fallen further since mid-2006 than during the 1990-91 recession, and professional traders bet they’ll plunge up to 10 percent more the next year.

“If the speculative traders making the big-money bets on where housing prices are headed are right, the question is not whether a U.S. recession is ahead but when it will start.”

A number of statistical releases over the past few days support this gloomy assessment. Today the Census Bureau announced (http://www.census.gov/const/newressales.pdf) that August new-home sales had fallen to 795,000. Take a look at Chart 21 (New Home Sales) and Module 5. It wasn’t long ago that new-home sales peaked at roughly 1,300,000. That’s a half-million more than the most recent figure and reveals that new-home sales have fallen by more than one third from their peak. If new-home sales fall by another 150,000, down to 650,000, that will represent a 50% drop. That’s the amount new-home sales fell during the last few recessions. Also note that new-home sales have fallen to where they were in the late 1990s. All of the gains from the bubble’s recent expansion have leaked out. That’s not a good sign.

On September 25 the National Association of Realtors revealed (http://www.beyourowneconomist.com/seminars_fs.html) that existing-home sales had fallen to 5.5 million and that home prices continued to erode. Another look at Chart 21 (Existing Home Sales) shows existing-home sales well down from their recent peak of roughly 7.0 million. That slide lets almost all the air out of the bubble. If existing-home sales drop to 5.0 million, we’ll be back to where we were in the late 1990s. You should also note that we haven’t had an existing-home sales fall-off of this magnitude for 25 years. Another bad omen.

When will residential real-estate woes finally bite into the economy’s overall performance? We need to look at consumer confidence and business investment for additional clues. Stay tuned.

Note: You’ll find chart references at http://www.beyourowneconomist.com/. Module references are to an online course that is under construction.