hmmmm, so, as monthly sales drop then that 10 months of inventory turns into 11 or possibly more than a years worth. Interesting to compare this housing problem with that in the late 80s/ early 90s.
So when the red bar exceeds the gray bar next month (OK maybe in November), we're over 12 months of inventory, which will be the first time that has happened in 20 years (or ever)?
Jas,
Household formation is not the end all and be all of housing demand. A large number of boomers have also gone and bought second homes, some of which are destined to be the retirement palace. Of course, if they have to choose they will pick just one house to keep as home.
Consider how many people in California bought houses in Phoenix using their equity and may just retire to Arizona with their pension and will just sell their prior residence to fund that debt free retirement. Same number of households, but less demand for houses. A similar situation will arise with the number of second houses in more rural settings that will eventually be inappropriate for aging baby boomers (lack of access to medical services).
As for the regular housing markets, well, a lot of speculators that thought they were investors might just be exiting the space soon.
Sales can drop to levels that you project, but most likely will not, as we do not have a real dollar, and will provide a bottom through inflation. Your total devastation scenario requires that the monetary system allow true deflation, rather than disinflation. Bernanke promised that it will not happen, and I take the man at his word- so buckle up and get ready for inflation Jas, and stop concentrating on just one asset class to prove the sky is falling. I will believe you that we have deflation when oil drops to $10 a barrel- but somehow I don't think I will ever see that again.
I wouldn't assume that the Fed can accomplish inflation, would you? How would you explain Japan's liqudity trap. They failed, and are still largely failing, at inflating prices. Why should it be any different here?
I know, I know, they've been succesfully inflating for 35 years, BUT imagine pressing on the gas a little more, just a little more - for 35 miles and then when the car runs out of gas saying - "oh yeah, watch this, I'm gonna put the pedal to the metal".
I find it odd that people expect the RE Sales velocity to continue at bubble rates given the end or ending of the credit expansion and loose lending criteria. Sales velocity below 4 million a year seems likely in the future unless lending requirements and credit expansion somehow can be unlocked not to mention the problem of were the demand is going to come from.
Gamma,
I would argue the ability to blow serial bubbles shows the Fed still has the ability to blow bubbles.
The problem comes in the adjustment all of that exported inflation will generate when it returns here- hence the comment that there will be a bottom in the housing market, and not at the prices of ten years ago in most places. In other words, the overall drop of value in the dollar will provide a cushion on the bottom. Will we get to the point where it costs more to build a house than it will sell for? Sure. But with copper going for $3.50 a pound, and oil at $85 a barrel, and ag products still being priced at the equivalent of $45 a barrel oil, I honestly don't see real deflation.
What our destiny would seem to be in this country would more resemble Argentina. We are subject to huge shocks in foreign exchange that will directly stimulate inflation in consumer goods. We have demand collapses occuring in housing and associated goods. We have a huge deficit already- THAT IS NOT INTERNALLY FINANCED- a la Japan.
In other words, we have to print money, huge amounts of money, with no reasonable choices left. Raising taxes to fund our intergenerational deficit is impossible (until 2009), and cutting spending while spewing out $400 billion a year in war costs is impossible. Our low savings rate means that internal finance is impossible, so more dollars are created to service ever more debt.
Got any better thoughts than print enough to push off the day that the world stops taking our dollars for their stuff?
WSJ - Mortgage Meltdown
"Home foreclosures are picking up speed, and right behind them are the politicians promising to save the guilty and punish the innocent." Mortgage Meltdown - WSJ.com
They had societal & public policy BOTH working to offset the effect of their monetary 'inflation' attempts. Resulted in 'price deflation'.
They were a nation of savers because there are NO substantial safety nets. If they don't save they either become dependent on their kids or starve. So flooding them with more money in times of uncertainty means they save even more... low rates for monetary reasons just mean they export the savings via carry trade.
Also their tax polices are savings friendly and and consumption unfriendly.
Lastly - their CB (BOJ) is very active in maintaining a weak yen to promote export trade - result is that they 'export their deflation' to the rest of us. They don't even suffer that bad from deflation.
We do everything in reverse - huge safety net promise, policy & societal bias toward consumption, strong dollar policy at least until recently, little or no savings & huge debt load.
Pump up our money supply and you'll see price inflation - bank on it.
While very few people mention it, there is a good chance Japan's liquidity trap was/is intentionally constructed. Those holding cash in 1990, have been able to gobble up a lot of property.
American politics will determine whether we go into a liquidity trap or not. It is all a matter of holding requirements, interest rates, and banking laws.
The question lies in, do the people with most political influence have a higher percent in cash holding than everyone else?
Odds, are they do. I don't think many farm owners and house owners are cash rich compared to these institutions.
dryfly said, "Lastly - their CB (BOJ) is very active in maintaining a weak yen to promote export trade - result is that they 'export their deflation' to the rest of us. They don't even suffer that bad from deflation."
Apparently they were unable to adequately export their deflation. They defalated nicely.
rapidly on the way down to an annual sales figure of 4m for used homes. this rate is also consistent with affordability. look back at when affordability was this low and look at annual used home sales, if i recall they were about 3.5m per year. given population growth, a reversion back to the 4m level is not unreasonable especially as underwriting standards move back to those in use during the 1991/92 era (last time affordability this bad). things obviously could get worse should job losses accelerate.
Apparently they were unable to adequately export their deflation. They defalated nicely.
Hardly at all really.
They had HUGE declines in stock & RE asset values resulting in only tiny drops in consumer prices... fractions of a percent to low single digits per year... nothing compared to the magnitude of the deflation in their asset values.
The full force of Plaza was what initiated it too - that glut of super-charged yen drove the asset values up... then the decline in export growth resulting from overly strong yen brought them back down.
Yet yen denominated consumer prices hardly dipped during that whole period.
And even as export growth slowed (even reversed for a while right after Plaza) they were able to continue exporting & most of those 'depressed prices' showed up as inexpensive Toyota's and Honda's in the US & Europe.
Not too tough on them at all - we got their 'price pressure' instead.
Interesting the inventory started going up before sales went down. This is going to get REALLY ugly when sales go down to normal levels, because they still look high on that chart.
hmmmm, so, as monthly sales drop then that 10 months of inventory turns into 11 or possibly more than a years worth. Interesting to compare this housing problem with that in the late 80s/ early 90s.
Thanks for the charts.
So when the red bar exceeds the gray bar next month (OK maybe in November), we're over 12 months of inventory, which will be the first time that has happened in 20 years (or ever)?
Old saying: Don't fight the Fed.
New saying: Don't fight CR.
--
CR,
Could you please give a good explanation of why sales wouldn't fall back to the lows of 1991, or 1981? Household formation peaked in 1970s, no?
Thanks.
Jas
Jas,
Household formation is not the end all and be all of housing demand. A large number of boomers have also gone and bought second homes, some of which are destined to be the retirement palace. Of course, if they have to choose they will pick just one house to keep as home.
Consider how many people in California bought houses in Phoenix using their equity and may just retire to Arizona with their pension and will just sell their prior residence to fund that debt free retirement. Same number of households, but less demand for houses. A similar situation will arise with the number of second houses in more rural settings that will eventually be inappropriate for aging baby boomers (lack of access to medical services).
As for the regular housing markets, well, a lot of speculators that thought they were investors might just be exiting the space soon.
Sales can drop to levels that you project, but most likely will not, as we do not have a real dollar, and will provide a bottom through inflation. Your total devastation scenario requires that the monetary system allow true deflation, rather than disinflation. Bernanke promised that it will not happen, and I take the man at his word- so buckle up and get ready for inflation Jas, and stop concentrating on just one asset class to prove the sky is falling. I will believe you that we have deflation when oil drops to $10 a barrel- but somehow I don't think I will ever see that again.
Someday this war's gonna end...
Allen-
I wouldn't assume that the Fed can accomplish inflation, would you? How would you explain Japan's liqudity trap. They failed, and are still largely failing, at inflating prices. Why should it be any different here?
I know, I know, they've been succesfully inflating for 35 years, BUT imagine pressing on the gas a little more, just a little more - for 35 miles and then when the car runs out of gas saying - "oh yeah, watch this, I'm gonna put the pedal to the metal".
And then you find... it already is.
No one could have expected it to get this bad.
Where's that David Lereah guy when you need him? The glass is at least a quarter full.
I'm sure today is a good day to either buy or sell a home...again.
There's something missing in the 2nd graph:
Where are the bars representing Oct-Dec 2006, and the bars representing 2007 YTD?
Lereah:
"There has never been a better time to foreclose or be foreclosed upon"
I find it odd that people expect the RE Sales velocity to continue at bubble rates given the end or ending of the credit expansion and loose lending criteria. Sales velocity below 4 million a year seems likely in the future unless lending requirements and credit expansion somehow can be unlocked not to mention the problem of were the demand is going to come from.
Gamma,
I would argue the ability to blow serial bubbles shows the Fed still has the ability to blow bubbles.
The problem comes in the adjustment all of that exported inflation will generate when it returns here- hence the comment that there will be a bottom in the housing market, and not at the prices of ten years ago in most places. In other words, the overall drop of value in the dollar will provide a cushion on the bottom. Will we get to the point where it costs more to build a house than it will sell for? Sure. But with copper going for $3.50 a pound, and oil at $85 a barrel, and ag products still being priced at the equivalent of $45 a barrel oil, I honestly don't see real deflation.
What our destiny would seem to be in this country would more resemble Argentina. We are subject to huge shocks in foreign exchange that will directly stimulate inflation in consumer goods. We have demand collapses occuring in housing and associated goods. We have a huge deficit already- THAT IS NOT INTERNALLY FINANCED- a la Japan.
In other words, we have to print money, huge amounts of money, with no reasonable choices left. Raising taxes to fund our intergenerational deficit is impossible (until 2009), and cutting spending while spewing out $400 billion a year in war costs is impossible. Our low savings rate means that internal finance is impossible, so more dollars are created to service ever more debt.
Got any better thoughts than print enough to push off the day that the world stops taking our dollars for their stuff?
I sure don't.
Someday this war's gonna end...
CR,
I believe the second graph has a mislabeled legend. The 2004-2006 bars should be 2005-2007, correct?
This answers gac's comment.
WSJ - Mortgage Meltdown
"Home foreclosures are picking up speed, and right behind them are the politicians promising to save the guilty and punish the innocent."
Mortgage Meltdown - WSJ.com
Maybe this has been covered before...does the NAR count foreclosures in as an existing home sale?
How would you explain Japan's liqudity trap.
They had societal & public policy BOTH working to offset the effect of their monetary 'inflation' attempts. Resulted in 'price deflation'.
They were a nation of savers because there are NO substantial safety nets. If they don't save they either become dependent on their kids or starve. So flooding them with more money in times of uncertainty means they save even more... low rates for monetary reasons just mean they export the savings via carry trade.
Also their tax polices are savings friendly and and consumption unfriendly.
Lastly - their CB (BOJ) is very active in maintaining a weak yen to promote export trade - result is that they 'export their deflation' to the rest of us. They don't even suffer that bad from deflation.
We do everything in reverse - huge safety net promise, policy & societal bias toward consumption, strong dollar policy at least until recently, little or no savings & huge debt load.
Pump up our money supply and you'll see price inflation - bank on it.
While very few people mention it, there is a good chance Japan's liquidity trap was/is intentionally constructed. Those holding cash in 1990, have been able to gobble up a lot of property.
American politics will determine whether we go into a liquidity trap or not. It is all a matter of holding requirements, interest rates, and banking laws.
The question lies in, do the people with most political influence have a higher percent in cash holding than everyone else?
Odds, are they do. I don't think many farm owners and house owners are cash rich compared to these institutions.
Then again, you never know who shows up to vote.
dryfly said,
"Lastly - their CB (BOJ) is very active in maintaining a weak yen to promote export trade - result is that they 'export their deflation' to the rest of us. They don't even suffer that bad from deflation."
Apparently they were unable to adequately export their deflation. They defalated nicely.
Japan also experienced Peak Population, which tends to limit your ability to exponentially grow, for what that's worth.
rapidly on the way down to an annual sales figure of 4m for used homes. this rate is also consistent with affordability. look back at when affordability was this low and look at annual used home sales, if i recall they were about 3.5m per year. given population growth, a reversion back to the 4m level is not unreasonable especially as underwriting standards move back to those in use during the 1991/92 era (last time affordability this bad). things obviously could get worse should job losses accelerate.
Apparently they were unable to adequately export their deflation. They defalated nicely.
Hardly at all really.
They had HUGE declines in stock & RE asset values resulting in only tiny drops in consumer prices... fractions of a percent to low single digits per year... nothing compared to the magnitude of the deflation in their asset values.
The full force of Plaza was what initiated it too - that glut of super-charged yen drove the asset values up... then the decline in export growth resulting from overly strong yen brought them back down.
Yet yen denominated consumer prices hardly dipped during that whole period.
And even as export growth slowed (even reversed for a while right after Plaza) they were able to continue exporting & most of those 'depressed prices' showed up as inexpensive Toyota's and Honda's in the US & Europe.
Not too tough on them at all - we got their 'price pressure' instead.
Thanks for the insightful charts and your ongoing coverage of the housing market.
Jay
Interesting the inventory started going up before sales went down. This is going to get REALLY ugly when sales go down to normal levels, because they still look high on that chart.