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Library Home Street Smart Report Home BEING STREET SMART by Sy Harding SHOULD WE LISTEN TO ECONOMISTS? May 29, 2009. The
problems for the economy began with the bursting of the real estate bubble in
2006, and spread into sub-prime mortgages, then into the entire financial
sector, and finally into the overall economy. At
each step of the way economists of Wall Street and the Federal Reserve were in
denial. They assured investors in the beginning that housing was not in a
bubble, that there were still many people who did not own their own homes, and
so there would be strong demand for many more years. When
the housing bubble burst anyway they said the problems would be confined to the
housing sector, and provided many reasons why that would be the case. When
the housing collapse immediately decimated the sub-prime mortgage market, they
said the problems would be confined to housing, and the sub-prime mortgage market, which had its own unique risks. When
it was discovered - to their supposed surprise - that the entire financial
industry, from banks and brokerage firms, to hedge funds and pension plans, were
heavily invested in sub-prime mortgages, (which became 'toxic waste' as there
was no market for them anymore, freezing up the entire banking system), they
said it would have a serious effect on the financial sector, which would need
significant government help, but would not spread to the overall economy. When
it spread to the overall economy they said the economy would slow some, but not
all the way into recession. When
they finally had to admit last fall that the economy was already in a recession
that had begun in December, 2007, they began moving to the opposite extreme,
with projections that the economy was spiraling down into the next Great
Depression becoming fairly common. Wrong
again. Next,
with the temporary improvement in retail sales and home sales in February, and
the coining of the phrase "green shoots appearing in the economy", the
pendulum swung swiftly to the opposite extreme, with the economists of Wall
Street and the Fed soon projecting that the economy is already bottoming, and
the media is spreading that word far and wide. What
a dizzy and emotional stream of errors, not small errors, but errors of major
magnitude. So,
please excuse me if I apply a healthy dose of skepticism to the tale they're
telling now. Basically
it is that, although very negative economic reports have returned after the
brief February/March respite, they are still a sign that the economy is
bottoming and about to recover, because the numbers are really bad but 'less
worse' than they were in the winter. Meanwhile,
I have said from the beginning that the problem began in the housing industry
and the recovery will begin in the housing industry. So
let's update the information, facts not fiction, from the housing industry. What
we see is that the Housing Market Index, which measures the confidence of
home-builders, rose to 16 in May from 14 in April. The index is on a scale of 1
to 100, so 16 is a miserably depressed number. It is being sold as "builder
confidence is on the rise", since the number shows the highest level of
builder confidence since last October (when the Index was at 14). A
more honest comparison is that it is even below the range of builder pessimism
in the first six months of last year, when builder sentiment was collapsing. The
index over those six months ranged from 18 to 20. In that context, it's
difficult to rate the improvement to 16 in May from 14 in April as builder
confidence being on the rise. No
wonder builders are depressed. This week it was reported that new home sales
rose a marginal 0.3% in April from record depressed levels, with new home sales
down 34% from a year ago. Keep in mind that a year ago sales had already plunged
double-digits over the previous 12 months. And
this week the Housing Price Index showed house prices declined again in May, now
down 18.4% from a year ago. And a year ago they had already plunged
double-digits over the previous 12 months. Several
months ago the government began providing first-time home-buyers with an $8,000
incentive bonus to get out there and buy a house. That can amount to more than
the entire down-payment for buyers making the minimum 3% down-payments available
on the lower priced homes that are the majority of sales that are being made.
Yet
existing home sales rose only 2.9% in April, about half of what economists were
forecasting. And by far most of those sales were 'short-sales', or sales of
foreclosed homes, to first-time buyers. But
the really bad news in the report was that even with the 2.9% increase in sales,
the glut of unsold homes grew by a big 9% as more homes continue to come on the
market. And
it is not just low-end housing that is in trouble. Homes priced above $700,000
are selling so slowly that there is now a 40-month supply at current sales
levels. The
story doesn’t end there. This week it was reported that the number of
foreclosures rose by a new record in the 1st quarter in spite of the
moratorium on foreclosures that Congress imposed on the major banks (which has
now been lifted). Meanwhile mortgage delinquencies jumped by a record amount,
indicating another record increase in foreclosures is probably taking place this
quarter. And that means still more foreclosed houses will be coming on the
market at fire-sale prices. Nor
does stirring 500,000 plus jobs being lost each month into the mix raise my
confidence that either home sales or foreclosure rates are going to reverse
anytime soon. I won’t mention the ripple effect of Chrysler and GM going
bankrupt even temporarily. That
leaves me struggling once again to believe what economists are handing out as
their latest projection for the economy - this time an early end to the
recession.
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