Wednesday, August 25, 2010

Housing & Asset Deflation

The Lehmann Letter (SM)

Today the Census Bureau confirmed housing’s predicament:

July sales of new homes fell to a new low of 276,000. This bad news follows directly on the heels of yesterday's word of the drop in existing-home sales.

New Home Sales

Click on chart to enlarge.)

Recessions shaded

And the chart makes clear that new-home sales have been stumbling around the bottom for the past year. To date all hopes of recovery have been premature.

Here's why.

1. We are in the midst of an asset deflation brought on by the reaction to the earlier housing boom. Since high interest rates did not cause the housing bust, low interest rates can't cure it.

2. Today's high unemployment is a consequence of housing's slump, not the cause of it. So don't expect falling unemployment to help any time soon. The causation will run the other way: Rising employment must wait for housing's recovery.

3. Households are busy re-liquefying their balance sheets. That won't permit large down payments and new mortgage-debt obligations.

4. There's a glut of homes on the market and the rising tide of foreclosures will sustain that glut in the near future. This will discourage homebuilders and new-home sales.

Only a massive mortgage write-down, funded by the federal government, could have alleviated this disaster. And that didn't happen.

So now it will take a long, long time to dig our way out.

(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.)

© 2010 Michael B. Lehmann

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