Thursday, January 29, 2009

Home Sales: The Heart Of The Problem

The Lehmann Letter ©

Today the Census Bureau reported the sale of 331,000 new homes in December ( ).

Take a look at the chart. Home sales have fallen from a record high of about 1.3 million to a record low of about one-third of a million. That’s a drop of three fourths, an unprecedented decline. And they may continue to fall.

New-Home Sales

(Click on chart to enlarge)

Recessions shaded

This chart, perhaps more than any other, goes to the root of the problem. Our easy-credit and lax regulatory climate from 2000 through 2006 generated a 100-year flood of home building. This was part and parcel of a general residential-real-estate asset inflation. It also underlay the growth of output and employment.

But the bubble burst in 2007 and an asset deflation ensued. The market for new homes shriveled along with the market for existing homes. The one-million decline in new-home sales is, of course, linked to the spiraling rate of home foreclosures. As foreclosed properties have flooded the market, the incentives to buy and build new homes have withered. Output and employment have shrunk accordingly.

We will not escape from recession until this problem is resolved. And the problem won’t be resolved until the foreclosures cease. A general foreclosure amnesty and federally-mandated delinquent-mortgage-workout program should be part of the economic stimulus package.

(The chart was taken from [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2009 Michael B. Lehmann

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