Wednesday, October 19, 2011

Residential Real Estate and Consumer Confidence

The Lehmann Letter (SM)

At first glance the Census Bureau's latest housing starts report looks good:

September starts were up by 15% to 658,000.

If you study the chart, however, you will receive a little lesson on the use of statistics.

Housing Starts

(Click on chart to enlarge)

(Recessions shaded)

The 15% increase seems good until you notice that 658,000 starts still leaves us in the doldrums. It will take many months of 15% increases, without any backsliding, before we reach the 1 million total that will truly signal a breakthrough.

That's too bad because the real-estate malaise holds everything back. See, for instance, the following article in today's New York Times:

Millions of consumers have lost confidence in their prospects because of the deterioration in their homes' values. Their balance sheets have shrunk and equity contracted. Liquidity is in short supply. They can’t spend like they used to.

This is a sharp reversal from the decades leading up to the recent crisis. Most households borrowed and bought, confident that rising asset values (homes and stock market) would make everything possible. Liquidity was not a priority.

How that has changed. Spending on autos and other durable goods has suffered as well as real-estate purchases. We’re in a funk and the way out has not yet become apparent.

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© 2011 Michael B. Lehmann

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