Wednesday, February 22, 2012

Existing-Home Sales: Still a Drag

The Lehmann Letter (SM)

The economy is gaining strength, but real estate continues to impede its progress.

That's not surprising because real estate was ground zero for the boom as well as the bust. Households compromised their balance sheets - too much debt, too little liquidity and not enough net worth - in order to acquire homes. Liquidity and net worth eroded further during the collapse as home-prices fell and households desperately attempted to repay their debts. Household balance sheets remain impaired today despite households' best efforts to retire debt, improve liquidity and boost net worth.

Consequently real estate remains ground zero for the economy's problems. Consumers can't buy homes and builders can't sell homes at a robust pace until households feel confident about their balance sheets. Consumers don't want to take on excessive debt and impair future liquidity with payment obligations. Until these facts change, real estate and residential construction can't improve. And that's enough to slow the economy's forward momentum.

Today's announcement from the National Association of Realtors that January existing-home sales grew slightly to 4.57 million at a seasonally-adjusted annual rate illustrates the problem:

Existing-Home Sales
(Click on chart to enlarge)

(Recessions shaded)

When you place 4.57 million on the chart you can see that home sales remain in the doldrums: No higher than levels attained 15 years ago and much lower than their 7 million peak at the height of the boom. Circumstances are improving. They are just not improving sufficiently rapidly.

On Friday the Census Bureau will announce January new-home sales. Don't expect a vastly different story.

(To be fully informed visit

© 2012 Michael B. Lehmann

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