While it appears to me that in the last 30 days the economy may have actually contracted slightly, a short period of contraction doesn't necessarily lead to or mean that we have begun a recession. As I have said many times, simply projecting current coincident trends into the future is a common mistake, and an excellent way to be wrong.
I've also pointed out that one of the big reasons for the lackluster jobs and income recovery in the last two years has been that housing basically hasn't participated. Instead, the recovery was led by manufacturing and exporting - a sector that commands ever less a supply of human workers. The flip side of that issue is the question, can you have a meaningful contraction if housing remains flat? As Dean Baker has pointed out:
a recession requires some component of spending to go into reverse and turn negative. In the past, it had always been housing and car buying which fell at double-digit rates at the start of a downturn. With these categories of spending already very low, there are few obvious candidates.And flat housing is. Let's look at the most important graphs:
First of all, here is housing permits (blue, let scale) and private residential construction spending (red, right scale):
Both of these made a bottom in early 2009 and have moved generally sideways with perhaps a slight upward drift since. Housing permits have been over 600,000 on an annualized basis for the last 4 months straight - the first time since just before the expiration of the $8000 housing credit in early 2010.
It's also worth noting that permits went sideways with a small downward bias in the two years before the 2001 recession - a "just barely" recession that probably would not be labeled such except for the renewed decline due to the September terrorist attacks.
Next, let's look at total construction spending (blue) and total construction employment (red) (the BLS does not break out residential construction employment. These are indexed to 100 in April 2006 better to show the trend):
Note that construction employment has stabilized and even increased slightly. Total construction, including the lagging commercial sector, has also ticked up. This is best shown on the next graph, which tracks the YoY% change in the same data series:
Both are finally showing no YoY declines (and remember that YoY comparisons lag turning points).
Finally, here are the 10 and 20 city Case-Shiller housing price series. Previously I have pointed out that in the last 6 months these have varied within an ~1% range. In the below graph, I have divided these prices by average hourly earnings:
Note that the entire bubble in prices has disappeared. Note that while prices have gone sideways this year, measured by how much labor it takes to buy those houses they continue to get cheaper. Cheaper prices mean more demand.
To sum up: not all of these series are leading indicators, but permits certainly are -- and they lead by about 12 to 15 months. Housing permits have gone sideways for the last 2+ years, and the slight downturn at the end of the $8000 housing credit is 16 months ago and is therefore receding as a factor. Private construction spending and employment have stabilized. Home prices as a share of income earned continue to get cheaper, while nominally stabilizing (meaning no increased pressure on existing homeowners). [Bill McBride a/k/a Calculated Risk, made a related point yesterday. The unemployment rate correlates highly with housing starts, with a 12 to 18 month lag. With housing in the last year or so going sideways to slowly higher, it is unlikely that the unemployment rate will significantly worse even if we technically enter a recession.]
Housing isn't playing along with a recession scenario, and thus even though at the moment we seem to have entered slight contraction, it is very unlikely that it can be anything more than shallow.
7 comments:
I'm not sure I agree with your confidence in your initial assumptions here.
I don't see how it's some kind of given that you can't have contraction if housing remains flat. We're not talking about housing remaining at a healthy level and as a high percentage of economic activity, we're talking about incredibly anemic home sales. This is a terrible market for selling a house.
Housing and car sales are not the _only_ possible sectors of the economy that could fall. And because they're so low, the other sectors all have a much greater influence than they normally would if housing and cars were at more decent levels.
They're not likely to plummet from here, but they're also not there to moderate the effects of anything else dropping out. You can't just assume for convenience that the signs of multiple derivatives always mean exactly the same thing for the multivariable result, no matter the actual range of values. I'd have been laughed out of any number of math classes for saying that was a valid assumption.
Not only growth but most actual activity is coming from elsewhere, and most of its sources are looking shaky.
Any number of other sectors of the economy could drop out. They are proportionally larger contributors than has been usual, so drops in any of them will be more dramatic in larger effect, no?
I don't know where we're going, but I don't see a good reason to be confident in this particular analysis, either.
All I know is that in my community a median wage cannot afford a median turnkey house. Maybe it can afford a "contractor's special" IF the buyer can even find a bank to lend. Most of these types of fixers need an all cash deal.
Conclusion: houses in my town are still unaffordable.
See this article on the two housing markets (http://finance.yahoo.com/news/In-the-US-two-housing-markets-apf-4261437457.html?x=0&sec=topStories&pos=9&asset=&ccode=).
Anon -- Oh, yeah. Here, apart from the _very_ wealthy areas where nobody seems effected by anything, hardly anything is moving except the <$150,000 market, stuff much above that is just outside what the average person here can easily do, and people aren't feeling confident about their long term wage stability. There are sales here and there at higher prices, but they're very slow, partly because in those ranges, people more often have to sell to move up than buy them as a first home. If they bought remotely recently, they're underwater, and if they didn't, they'd often rather wait to sell than accept such a low return.
In the stuff that's actually moving, most are short sales (which the banks _still_ can't seem to figure out how to do efficiently) or foreclosures. Most are in neighborhoods that... well, I enjoy them, but they're considered pretty sketchy. At least half are in need of serious ($10,000+) work to be minimally ready, especially the foreclosures -- the banks refuse to even minimally protect the houses from major pest problems, at this point. Many also have major permitting issues. And _if_ you can get a lender to work with you on all of that, you're then competing with a bunch of cash buyers with fantasies of renting or flipping (it's not working out well for most, but they keep right on trying).
Where there is demand, it faces immense barriers apart from the price tag. I've been looking, and I know several young folks looking right now, I've been looking, and we've all lost to lower offers by cash buyers at least once. I offered on a foreclosure I really liked, but it is now being eaten by borer beetles and will probably be beyond help soon, because the bank wouldn't lower the price or do anything about the pest work while it was less major. More than a few folks I know have just stopped being bothered for now, and quite a few can't get loans to work with the properties they can actually afford to buy.
Add to it that people aren't confident that the house will even hold its current value, and you've got a picture where stoking demand is much more complicated than just lowering the prices. Price matters, but it's going to take a lot to get demand really stoked, and it's not _all_ about price, it's also about totally dysfunctional processes. And there's so much foreclosure activity around here that I can't see any serious building starting anytime soon.
This statement just seems wrong: "Cheaper prices means more demand". That doesn't make sense. Cheaper prices plus equal levels of demand will mean more sales, but prices shouldn't have any effect on demand. Either you want something or you don't. If you want it and the price goes down, you're more likely to actually buy it. Making something you don't want cheaper isn't going to make you want it.
Hard to sink a boat if it's already underwater. Doesn't mean it doesn't have holes in it.
I'm saying housing isn't sinking because it doesn't have anywhere to go -- deleveraging created huge support underneath where it's at now. Markets are still overvalued in the sense that most people can't afford housing, but prices have reached a point where many sellers would rather just sit and wait for years, even paying annual property taxes, than take any further losses. Is it rational? Probably not, but the emotional pain in losing so much equity so quickly shouldn't be understated. It's the academic economists that don't model human behavior, right?
I wouldn't look to housing as an indicator, at least this time around.
"Probably not, but the emotional pain in losing so much equity so quickly shouldn't be understated."
What those sellers don't get is most of that was phantom equity in the first place, that is, NOT purchased with principal payments, and "equity" in excess of the historical 3% annual housing appreciation.
What's more, they are insanely jealous of their neighbor who managed to find a fool to pay the phantom equity with real money, or they put themselves underwater by taking out a huge home "equity" loan. Banks were happy to get real interest calculated on phantom equity.
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