Monday, September 20, 2010

This Week

The Lehmann Letter (SM)

This is a big week for housing data: On Tuesday and Friday the Census Bureau releases its reports on housing starts and new home sales, while on Thursday the National Association of Realtors announces figures for existing-home sales.

They are important because residential real estate was the recession's ground zero. We can't have a robust recovery and expansion until residential real estate returns to health.

But the building and bursting of the recent real-estate bubble created a new kind of recession. This recession did not flow from rising inflation and rising interest rates. Those past recessions were easily remedied by policies that generated falling inflation and falling interest rates. Low rates meant more borrowing and spending and a snappy recovery and expansion. This time we had an asset inflation followed by asset deflation. Now household balance sheets are compromised by scarce liquidity and falling equity. Low interest rates can't encourage households to buy new homes. They don't have the wherewithal and they remain poor risks.

As a result the asset deflation created both supply and demand problems. There are too many homes in foreclosure adding to the glut of unsold homes. At the same time households can't or won't buy new homes because their finances are too insecure.

New Home Sales

(Click on chart to enlarge.)

Recessions shaded

The chart is worth a thousand words. You can see the boom and bust, and you can see that new-home sales have been hanging out at a depressed 400,000 for the past year. That figure must increase by 50% to 600,000 before we can claim robust recovery and expansion. But July sales fell to only 276,000. On Friday we'll know August's sales figure. Let's hope it's headed sharply north.

(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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