Friday, August 19, 2011

The Root of the Problem

The Lehmann Letter (SM)

Yesterday the National Association of Realtors reported 4.67 million existing homes sold in July:

Past issues of this letter have focused on new home sales and new construction. But the Realtors' report gets to the heart of the current economic problem.

The latest data coupled with the chart don't indicate a slump and don't indicate growth. We see fluctuation in a range that is too high to bring on recession but not high enough to spark full employment.

Existing Home Sales

(Click on chart to enlarge)

(Recessions shaded)

We remain somewhere in between: Neither bust nor boom. The chart illustrates the problem. We had a terrific run for over a decade. Now we want to retake those heights. But that desire conflicts with what happened to household balance sheets during the fat years. We stretched thin both liquidity and equity while piling on debt. It is true that households are making a valiant effort to unring that bell, and many bad debts are being written off. But that doesn't mean that household balance sheets are in good shape or that the good old days have returned.

Lenders are picky and have escalated standards. Home prices have fallen and remain in the doldrums, removing a key incentive to buy. And households are far more protective of their liquidity and reluctant to take on debt than they once were. It's not enough to generate a slump, but it is enough to inhibit robust growth.

(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.)

© 2011 Michael B. Lehmann

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