Plunge in home sales not pretty, but necessary for real recovery...
Read more …Plunge in home sales not pretty, but necessary for real recovery
By Frank Ahrens
Painful as it is to take in the short term, today's news about the plunge in home sales is exactly what this economy needs for the long run.
Think of it as an economic colonic. Not pretty, but necessary.
This morning, the National Association of Realtors said that sales of existing homes in July hit their lowest level in 15 years, despite historically low mortgage rates. The decline was nationwide, with all regions dropping. Sales of existing homes (as opposed to new ones) make up the bulk of the market, so today's number gives you a good picture of the dismal situation.
The next thing you need to know is that home prices are probably going to drop, perhaps precipitously. This is simple supply and demand. If no one is buying the thing you're selling, you lower the price. Prices drop until demand matches supply, and then prices stabilize. And that's where we were before this decade's housing boom that led to the financial crisis.
We now know that the U.S. housing market expanded into an artificial bubble through the first half of this decade, with home prices peaking in 2006. Builders were throwing up subdivision after subdivision of spec houses in anticipation of demand, as the White House said that home ownership was the right of every American. Bankers and brokers peddled exotic mortgages that made it look like you could own a home for practically nothing.
People who already owned their homes watched the so-called value of those homes skyrocket. Intuitively, they knew that their $300,000 house really wasn't worth $600,000, as the market was telling them, but -- what the hey? -- everyone else is profiting, so why shouldn't they? Too many homeowners treated their rapidly inflating home values like ATMs, taking out home-equity loans to buy stuff. The economy hummed along on this false boom.
And then it all collapsed, nearly sending the entire financial system over the edge.
To counter the crisis, the government wisely saved the banks, because if the banks went down, everything else would follow. You may not like it -- and it's difficult to swallow the bailouts -- but that's the nature of this system.
But after the system stabilized, the government took the next step and tried propping up individual industries. Helping homeowners was a political no-brainer, especially after the unpopular big bank bailouts. The government tried a two-pronged approach: Help troubled homeowners stay in their homes, and goose the housing market to get it back on its feet.
The first effort has had, at best, mixed success. We learned earlier this week that half of the homeowners who enrolled in President Obama's flagship mortgage-relief program have dropped out.
The second effort -- government-sponsored attempts to prop up the housing industry -- has only postponed the inevitable pain. The government offered a home-buyer tax credit program last year, then extended it, then extended the deadline for closing on new purchases, in an effort to spur sales.
And, for a time, it worked. But literally the minute that the government subsidies stopped, home sales fell off the cliff. Again, this is simple economics. I don't know why it still surprises us. We saw the exact same thing to auto sales when the government's cash-for-clunkers program ended last year.
The bottom line is this: Government-subsidized programs that prop up troubled industries help for as long as they exist, but rarely create any lasting demand. It's like a car with a bad battery that won't hold a charge. You can use another car to jump the battery, and the car will run for awhile, but once that charge runs out, your car will stop again.
Economists have been saying since spring that housing prices have not bottomed, that they could be heading for a double-dip. A rebound in home sales and prices was the basis for the hoped-for "V-shaped" recovery. Now, it looks more like a "W-shaped" recovery is on the way.
Further, the economic recovery we've seen since the March 2009 stock market rally began has stalled. Economists are reducing their estimates for growth for the remainder of this year, and new weekly unemployment claims are going the wrong way.
You've probably already seen the value of your home drop 20, 30, 40 percent over the past four years. That's painful, especially because it's the largest purchase most Americans will make in their lives. But today's number -- combined with the general economic malaise -- tells us that home prices probably still have not hit bottom.
And that's exactly what needs to happen before the economy can right itself.
