Prediction Tuesday - Housing Slumps

Across the US, housing statistics are beginning to reflect the sharp slowdown over the past year. Many sectors of the economy are affected by the housing market: appliances and furnishings, building materials, the finance industry.

The slowdown in housing was even blamed when Ford shut one of its pickup assembly operations: Contractors use a lot of pickups. An economy which has floated on cheap money and housing construction is settling down into the sea of red ink.

EPI's Snapshot last week highlighted some of the indicators:

• Sales of existing homes fell to near 2004 levels.
• New home sales are well below last year's level.
• Inventories -- homes currently on the market -- are at record highs.
• Supply? Demand? Of course prices are softening.
• Jobs directly related to housing contributed 14.1% of employment growth in 2004, 15.4% in 2005, only 4.5% this year.
• This does not count jobs related to household goods, such as appliances, or other ancillary employment
• Residential construction's contribution to GDP growth dipped to -0.4% in the second quarter of 2006, after peaking at over 1.0% a year earlier

As Bernstein and Bivens of EPI say, "Even more important in terms of dollars pumped into the economy is the appreciated home values, which have been an important source of stimulus over the past few years."

This last point corrects a claim I copied Sunday from the Center for American Progress, which said that increased personal debt is arising from purchase of big ticket items, not consumer debt.

This is less true by the amount of home equity that has been withdrawn to finance current purchases, the "home as a piggy bank," factor.

Depreciating housing values will have the effect of stopping the home equity stimulus. If the disparity between sagging home values and the amount loaned is "called in" by the lender, it could begin to act as a real drag.

Dean Baker of the Center for Economic and Policy Research was even more blunt in an op-ed in Tom Paine entitled "The Coming Housing Crash."

"This is a very different picture from a year ago," he says.

• Sales of new and existing homes are both down more than 10% from last year
• Mortgate applications are down 20%
• Sales prices are barely above last year, and actually down in real (inflation-adjusted) terms


• The vacancy rate for ownership units has hit a new high, along with inventories of both new and existing homes

Baker made his reputation in being one of the very few economists to peg the dot.com bust. There he concentrated on the historic trend in price/earnings ratios. Here he's applying a similar historical trend analysis to the housing market:

"Ordinarily, house prices rise at roughly the same rate as other prices. Nationwide, house prices stayed virtually even with the overall rate of inflation from 1950 to 1995. However, in the last 10 years they rose by more than 50 percent, after adjusting for inflation. This created more than $5 trillion in housing bubble wealth."

With the bubble finally deflating, we're looking not just at lost paper wealth, but at the loss of millions of jobs. The fallout will be severe. As Baker puts it:

"The crash and post-crash world will not be pretty. Millions of people will lose their jobs and their homes. Unfortunately, the economists who led us down this path are not likely to be among the ones who suffer severe consequences."

The Census Bureau/HUD Residential Construction Release on August 16, had the following tidbits:

• Building permits for all housing units were 21% lower than a year earlier; 30% lower in the West;
• Single familiy units were 23.5% lower overall; 33.5% lower in the West;
• Housing starts for all units were 13.3 percent lower than a year earlier; 13.9% lower in the West;
• Single family units started were 16.6% lower overall; 25.8% lower in the West;
• Housing completions were 2.3 percent above one year ago; but they were 16.2% lower in the West;
• Single family completions were 1.2% higher overall; but a full 19% lower in the West.

The National Association of Home Builders (NAHB) and Wells Fargo produce the Home Builders Housing Market Index. A number over 50 indicates that more builders view sales conditions as good rather than poor.

• The August HMI index was its lowest since February 1991; the index has fallen for seven consecutive months;
• The single family home sales segment fell to 36, the sales expectations segment fell to 40, the sales traffic segment fell to 21;
• The total HMI index fell to 15 in the Midwest, to 41 in the South, and to 42 in the West.