The Oser View

New Home Sales--The Collapse Continues

The Commerce Department reported this morning that sales of new homes in December fell to the lowest level since national recordkeeping began in 1963, when the population of the United States was 61% smaller.  Like most housing data, new home sales are reported on an annualized basis.  In December, sales were reported at an annualized pace of 331,000.  The actual number sold was 23,000, a mere 6.4% of the total 359,000 new homes available for sale.  Of these 23,000 homes, only half were sold before they were completed.  If a new home is completed before it can be sold, the median time it will stand vacant is now more than nine months.  Prices are falling too.  The median sale price of a new home in December was $206,500.  That’s a 9.3% decline from a year earlier and a 21% drop from the peak in March 2007.  Less than 1,000 homes in the entire country were sold for more than $750,000.    

In other news, the number of Americans collecting unemployment insurance surged to 4,776,000.  As with so many negative statistics these days, this is the largest number since recordkeeping began in 1967.  With many large companies—Caterpillar, Starbucks, Jabil Circuit, just to name a few recent ones—announcing layoffs, the ranks of the unemployed are certain to swell in the weeks ahead.

The Fed Pulls out the Stops

The expression “pull out all the stops” literally means to open all the pipes of a pipe organ to make it as loud as possible. The statement issued today by the Federal Open Market Committee (FOMC), the Fed’s policy arm, is a figurative example of pulling out the stops. The FOMC is saying, loud and clear, that the economy is in big trouble. The statement is a promise that the Fed will do everything it can to “promote the resumption of sustainable economic growth and to preserve price stability.” The Fed acknowledges that key economic indicators of business and consumer activity and of employment “have continued to decline steeply.” The FOMC does not use the word “deflation,” instead employing an elaborate circumlocution. “The Committee sees some risks that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.” Alan Greenspan, the master of obfuscation, could note have enunciated it more eloquently. Since the fed funds rate is already at rock bottom, the “all available tools” the FOMC vows to use essentially means that the Fed will pipe liquidity into the financial system by expanding its already substantial purchases of Treasury securities and other high-grade bonds. The goals are to stimulate mortgage lending and the housing market and to unfreeze non-government credit markets. Under most circumstances, the promise of virtually unlimited government liquidity would be a wildly inflationary monetary policy. Under present circumstances, it may be just sufficient to achieve the Fed’s aims.

Pictures

 

There are two kinds of economic crises:

• The kind you wouldn’t know about unless you read it in the newspapers or saw it on TV.
• The obvious kind.

In the last 100 years in the United States, there have been many of the former, but just three of the latter:

• The Great Depression of the 1930s;
• The Great Inflation of the 1970s;
• The As-Yet-Unnamed Great Catastrophe we are currently living through.

This month’s commentary is about the obvious.  In keeping with our theme, there will few words. 

Picture #1:  Annualized percentage changes in Gross Domestic Product (Quarterly):

Without exception, economists expect a historic decline the market value of all the goods and services produced in the United States in last year’s fourth quarter.

Picture #2: Retail Sales:

 

Retail sales (excluding autos) account for 68% of US GDP.  The current decline of five consecutive months and counting is unprecedented.

Picture #3: Retail Auto Sales:

 

Auto sales in dollars have declined all the way back to 1998, when there were 30 million fewer Americans.  No wonder car manufacturers are in a mortal struggle for survival.

Picture # 4: Unemployment

 

Unemployment peaked 18-24 months after the 1991 and 2001 recessions ended.  Companies were forced to improve productivity during lean times, which enabled them to contain payrolls until expansion was well underway.  Unemployment has already exceeded the 2003 high and is closing in on 1992. 

Picture # 5: Unemployed College Grads

 

 

While only half the general unemployment rate, the percentage of unemployed workers with college degrees is at all-time high.  Any number of studies have demonstrated that college-educated workers are more employable and earn significantly more over their work lives.  Will the crisis call that basic premise into question?  

Picture # 6:  Building Permits Issued

 

Just 615,000 residential building permits, at an annualized rate, were issued in December.  This was a drop from the high of 2,263,000 in September 2005, and, incredibly, the smallest issuance since the Commerce Department began keeping records in 1960.  Practically speaking, no new housing units will be built in 2009.

 

Picture #7: Existing home sales 

For much of 2008, existing home sales appeared to have stabilized, although at the low level of five million units a year.  In November, they took another plunge, to 4.5 million units.  Then there’s the bad news.  Nearly half of existing home sales in November were of foreclosed properties.  This means that the already anemic number of home sales is exaggerated by flippers who will put their properties back on the market when home values show the first sign of rebounding. 

 

Picture # 8: Dollar changes in the total household debt

 

Pictures tell a story, not only with the data they contain but even more fundamentally by their shapes.  I have sought for months to understand the financial crisis and to find ways to convey its essential elements.  This picture encapsulates it all. 

A modern society needs credit like the human body needs fats and sugars.  It can take decades for fats and sugars to reach dangerous levels in the body; it took generations for consumer credit to reach a dangerous level in American society.  Slowly at first, then faster and finally with a rush, we Americans funded our ever more comfortable lives by erecting a mountain of debt.  We are now falling, falling off the other side.  In last year’s third quarter, household debt contracted for the first time since the Federal Reserve began keeping records in 1952.  Still, total household debt outstanding is $13.9 trillion, approximately equivalent to one-year’s GDP.  Our personal debt is 114% of our total annual personal income from all sources.  It is 130% of our annual disposable income.  Ten years ago, household debt was 90% of annual disposable income.  Forty years ago, it was 64%.  We have a long way to go.

The paradox is that the huge coordinated efforts of the Congress, the Executive Branch, and the Federal Reserve to defeat the crisis are entirely based on stimulating more credit. Only by more borrowing, will Americans be able to keep spending, which is the only way to spark GDP growth. 

Picture # 9: Consumer credit outstanding at commercial banks

 

The irony is that banks haven’t stopped lending.  After dipping slightly in the first quarter, consumer credit outstanding at US commercial banks has increased by more than 8% to an all-time high of $863 billion as of November 30.  Yes, credit standards have tightened. Yes, the markets for securitized consumer loans, aside from mortgages that meet Fannie Mae and Freddie Mac standards, are moribund.  But credit is a two-way street.  The nub is not that lenders won’t lend; it’s that creditworthy borrowers won’t borrow.  Consumers have seen their retirement nest eggs depleted.   They know people who have lost jobs or been foreclosed out of their homes.  They are worried about their own jobs.  Naturally they have cut back on their spending, which in America means by definition, that they have cut back on borrowing.  They are doing exactly the right thing, and how do you fix that? 

 

An Inglorious End to an Inglorious Era

The George W “Herbert Hoover” Bush presidency comes to a fitting and dismal close with the most job losses since 1945.  All told, the economy shed 2,589,000 jobs last year, of which 1,531,000 came in the fourth quarter.  The unemployment rate jumped from 5.0% in December 2007 to 7.2% last month.  In December 2000, Bill Clinton’s last full month as President, it was 3.9%.  The number of unemployed persons, including those actively seeking work and so-called “discouraged workers” who have despaired of finding suitable employment, has risen 40%, from 19.4 million In December 2007 to 27.3 million.   Employment in the manufacturing sector dropped to 13 million, a mere 9.6% of the labor force.  Fewer workers are engaged in manufacturing than at time since 1949, when the total labor force was less than a third of what it is now. 

I could go on, but it’s too depressing.  The employment situation is bad, and—as President-elect Obama said yesterday, “It’s going to get worse before it gets better.”