Click to enlarge.
The chart shows annual single unit housing starts per person. The green trend line is through the largest booms. The blue trend line is through all of the data. The red trend line is through the largest busts.
1. From a housing start perspective, this boom and bust was virtually identical to previous booms and busts. The Fed should have easily seen this coming. Very near the peak we were told there's no housing bubble to go bust though.
2. Look at each of the prior major busts. Housing starts bounced high once the bottom was found. There's a name for our most recent bounce though and it has both dead and cat in it. Sigh.
3. Look at those long-term trend lines. In my opinion, we have built an economic ponzi scheme around a faulty long-term exponential growth model. Homeownership is a pillar of our economy so we are therefore in serious trouble. (I searched specifically for "pillar of our economy" and sure enough it took me to the National Association of Realtors. They were testifying before a Senate panel. Doesn't that just figure.)
4. Inflation has convinced investors time and time again that prices only go up. Inflation is the problem. It distorts our opinions. It leads to malinvestment. Some would argue that we just need more inflation right now and our troubles will be solved ($100 oil notwithstanding). However, look at the 1970s in that chart. Most of the red data points are from that era. Keep in mind that those red points also represent missing construction jobs.
5. And lastly, I turned bearish in 2004 due to our ultra low rate interest rate policies and their impact on debt and housing. How have those policies worked out for us so far? If you think I'm going to turn bullish because we're still trying these very same "free lunch" policies then get used to disappointment.
Source Data:
U.S. Census Bureau: New Residential Construction
St. Louis Fed: Population
Here's another statistic to keep in mind.
ReplyDeleteAt 0.006 housing starts per capita (at the peak) the typical family of four would be buying a newly constructed home every 42 years.
If the typical family of four buys a newly constructed home every 42 years, then what is supposed to happen to all of the existing homes? Who is buying those?
Pending Sales of U.S. Existing Homes Drop 12% as Foreclosures Hurt Values
“This makes me believe it will take longer to clear the excess inventory,” said Michelle Meyer, a senior economist at Bank of America Merrill Lynch in New York. “It pushes the housing recovery even further out into the future.”
/snarkon
What's the solution? We could just burn existing homes. It would ruin their appeal as a long-term store of value though.
/snarkoff
Disclosure: I am shooting myself in the foot of course. I own an existing home. I'd like to see it hold some of its value long-term. The snark must be Fed though.
Canada is about to learn our lesson I think (the hard landing way).
ReplyDeleteMay 30, 2011
Home construction to slow in second half of 2011: Canada Mortgage and Housing
There had been widespread expectations early this year that the Bank of Canada would begin to hike its rates in June or July but many observers now think it will be later than that because of a softening of economic growth.
I'm talking to you Vancouver.
Canada is about to learn our lesson I think (the hard landing way).
ReplyDeleteAustralia is closer to a hard landing, but Canada will get there :)
In Oz, sales have slowed and the banks are using increasingly lax credit and fancy new loan structures to keep things moving. It is almost exactly the way the bust started here.
At least the US won't be alone in the Greater Depression.
Mr Slippery,
ReplyDeleteAt least the US won't be alone in the Greater Depression.
I must share today's LivingSocial deal.
If you find yourself chanting, "Eggs, toilet paper, paper towels, and milk," restore some meaning to your mantra and find focus with today's deal: $45 gets you an all-day Effortless Mind meditation class (a $115 value) at...
Illusion of Prosperity: search results for "toilet paper"
I definitely chant it, lol.
Inflation somehow took American meditation up to a $115 value but deflation has brought it back down to $45. This concept is not going to help me relax today.
Here's today's chant.
hoardin' goods, ditchin' services
hoardin' goods, ditchin' services
...
Urban Dictionary: ditchin
Making plans and cancelling for better plans.
Dang, I won 2 free tickets but no powerball jackpot! Guess I have to go to work tomorrow.
ReplyDeleteGYSC,
ReplyDeleteI have a chant just for you! ;)
ditchin' work Americans don't want to do
ditchin' work Americans don't want to do
...
I bet we could win a stressball jackpot. It is practically a sure thing, lol.
>However, look at the 1970s in that chart. Most of the red data points are from that era. Keep in mind that those red points also represent missing construction jobs.
ReplyDeleteActually those 1970s cut-outs weren't due to falling demand but just the Fed being dicks:
http://research.stlouisfed.org/fred2/graph/?g=Ef
It's my understanding that the baby boom was flooding into the economy in the 1970s and generally finding work. This was immensely inflationary, in a good way, but the Fed wanted to fight this real growth - credit - wage cycle so they did what they could to stop it.
I agree that any inflation now is bad inflation, because we've offshored our jobs and are a lot more dependent on strong petrodollars.
$20 gas is really going to suck in this country.
What the housing boosters fail to understand is that land is the source and sink of all wealth.
You can import water, you can import air, but you can't import land. This makes it the natural domain of the specuvestors, and when they run riot, bad things follow.
Troy,
ReplyDeleteYour chart is fascinating. It does support your 1970s theory about the Fed.
In my opinion, we should have had high gasoline taxes all along (and lower taxes elsewhere). It would have encouraged us to build our homes more energy efficient, closer to where we work, would have kept some of the money spent on oil in this country, and it would have helped shelter us from oil price shocks.
It is too late to increase gasoline taxes now though. That horse has left the barn. We've already built the houses and as you say they aren't exactly easy to move. We now rely on cheap energy to justify them. Current gasoline prices are now their own form of taxation (but we aren't keeping the revenue). Sigh.
$20 gas is really going to suck in this country.
Earning $10 per hour 8 hours per day (after taxes) with $20 gasoline and a 20 mpg car sets your maximum one-way commute distance at 40 miles. That's assuming you can live while spending every single dollar you earn on gasoline.
So yeah, $20 gasoline would really suck.
Troy,
ReplyDeleteHere's an alternate version of the 1970s story to consider.
Oil vs. Fed Funds
I think oil was scaring everyone, including the Fed. Perhaps rightly so.
Pres. Jimmy Carter Declares End on Foreign Oil Dependence
Interesting stuff, Mark. The red dots correspond just about perfectly, and 1 for 1, correspond with recessions. I will not speculate about cause and effect.
ReplyDeleteCoincidentally, I just took a historical look at housing also.
As for the Fed, though I certainly will agree that they are dicks, I don't agree that their power to determine interest rates is what everyone (well, almost) makes it out to be.
Cheers!
JzB
Jazzbumpa,
ReplyDeleteFrom your post:
But I am willing to posit that a great deal of the debt overhand is specifically housing related. And until that situation is corrected, the housing market and general U.S. economy are going to be in a sad, sad state. Good bye, American Dream.
Indeed.
As for the Fed, though I certainly will agree that they are dicks, I don't agree that their power to determine interest rates is what everyone (well, almost) makes it out to be.
I agree with you. It is actually why I was comfortable buying 30-year TIPS recently even though it is common knowledge that the Fed is expected to back off of their purchases soon.
In my opinion, the Fed is just one buyer of many. The market is bigger than they are. Nobody is forcing people such as myself to buy treasuries even while the Fed is doing it. I choose to do it because I can't see any suitable "safer" alternatives. There will be treasury demand when they stop. I'm fairly confident about that. The dollars have to go somewhere. It makes more sense to buy treasuries than bury them in one's backyard.
Jazzbumpa,
ReplyDeleteYou might get a kick out of something I wrote back in November that supports your Fed theory.
The Sarcasm Report v.69
Allow me to summarize the thinking here.
QE2 is driving interest rates down. This will encourage spending. This is the Fed's plan.
QE2 is driving interest rates up. This will raise inflation expectations. This is the Fed's plan.
In other words, no matter what happens to interest rates we'll be able to point to the Fed's plan as a success.
Genius! And to think that I once thought the Fed was rather impotent. God how I love the hard science of economics to prove me wrong.
Stag,
ReplyDeleteThanks for the Princess Bride reference - they never get old!
Why is it that eCONomists rarely if ever questioned the decades long trend of "Financial Profits of Unusual Size" (FPOUS)? Seriously, according to eCONomic theory, the FPOUS shouldn't exist.
It's the fraudulent debt, stupid!
The Fed's decades old policy of enabling Wall St. to create debt far in excess of output has impoverished the majority. This simple fact should be obvious yet it is rarely discussed in the MSM. Very telling, imo. Dual mandate my @ss!
Anyone that believes that further financial manipulation and extractive debt creation will lead to prosperity for the the majority needs to have their head examined. The trend is your friend? Only if you work in the financial fraud industry.
Get used to disappointment. Indeed! The problem is presented as the solution.
mab,
ReplyDeleteOh, what I wouldn't give for a holocaust cloak!
P.S. You are right. It never gets old for me either. ;)