paulbissett.com

I have become a real fan of the CalculatedRisk blog.  This article summarizes some of the headwinds faced by new home builders.

Figure 1. Total New and Existing Home Sales and the gap between them (source: The CalculatedRisk blog).

1) The stimulus funding for home buyer tax credits has generated demand for homes, at the expense of draining the pool of future home buyers.  There does not appear to be any political will to extend these credits.  Short-term demand for total homes is likely to fall (Figure 1).

2) Foreclosures and distressed pricing of existing home sales will continue to increase in the mid- to high price ranges, but appear to have peaked overall in 2009.  They will continue to remain at higher than historical levels in the lower price ranges (Figure 2).

Figure 2. California foreclosures (source: The CalculatedRisk blog).

I am personally concerned about the possibility of a double dip recession.  While economic demand is increasing off of last year’s lows, we are not growing top line economy-wide revenues as would have been expected for recessions of this size.

This period looks remarkably like the 1974-1976 period; and the key to housing, and the economy in general, is unemployment. If we stay above 9% through the end of this year, I believe that the economy, and therefore housing, will remain (at best) at anemic levels.

3) The continued high levels of foreclosures, combined with high unemployment, will continue to drive pricing in housing to low levels.  These levels will probably be below replacement costs, and we will continue to see low levels of new homes to existing homes sales ratios (Figure 3).

It took 4 years to reach this level of lows in the new home to existing home sales ratio.  Given the current economic (and political) environment, I would expect that it will take a similar amount of time for new home sale to recover to the long-term average of ~15-20% of existing home sales.  However, return to this level would also be commensurate with a return to total new home sales of about 600,000 to 800,000 units, which is nearly half of the peak in 2005 (Figure 1).

This, of course, is a national average.  Places like Florida, California, Nevada, and Arizona may have a longer recovery period.

A recovery of the new home housing market, to half of its peak, in 4-6 years, will not feel like much of a recovery.  It will feel more like survival.

The juxtaposition of several articles hit me all at once today.  The first was a great article by T. Friedman in the New York Times on the exaggeration of the “decline” of the United States.  It was a solid article on the ingenuity of the American people, as well as the advantages in US immigration and population demographics.  The economic possibilities afforded to the US by these advantages should lead to increasing economic growth in the coming decades.

This was balanced by the two articles in the Wall Street Journal that discuss youth unemployment and the current discussion in Washington, DC of a federal Value Added Tax.

Here’s the gist -

From Daniel Henninger’s article -

The U.S. unemployment rate for workers under 25 years old is about 20%.

This is similar to the perpetual unemployment rate for youth in old Western European nations.

These are the Western European nations that spent the postwar period free of Soviet domination. With that freedom they designed what came to be called the “social-market economy,” a kind of Utopia where a job exists to be protected and the private sector exists mainly to pay for the state’s welfare plans. … In the final month of 2009, these were European unemployment rates for people under 25: Belgium, 22.6; Spain, 44.5; France, 25.2; Italy, 26.2; the U.K., 19; Sweden, 26.9; Finland, 23.5.

Couple these unemployment statistics for youth with this tidbit from the WSJ Editorial Board -

“Answering a question at the New York Historical Society on Tuesday, Mr. Volcker said that a VAT—a consumption tax levied along stages of production—”was not as toxic an idea” as it has been, and that both a VAT and some kind of tax on energy need to be on the table. “If at the end of the day we need to raise taxes, we should raise taxes,” he said.

The VAT has been a staple of European taxation policies for decades, and high rates of taxation is one of the causal mechanisms of slow economic growth in the countries.

In the middle of the worst economic situation in nearly a century, we are building the economic policies that replicate the social welfare state of old Western Europe.  These policies have led to perpetual under-employment (particularly of youth and immigrants), low economic growth rates, and stratification of the economic classes (i.e. limited upward mobility amongst the economic classes).  Is this the future model of the US economic system?  I hope not.

Long-term economic survival requires a successful risk/reward system that provides opportunities for great success, and great failures.  Why?  Because without a risk/reward system (with both the highs and lows) you get a steady state society that eventually leads to stagnation.  And stagnation of an economic system will eventually lead to its demise.

In short, you can not (over) tax the system to reduce economic disparities; nor can you (over) regulate the economy, and the people, to keep bad things from happening them.  If you do, the system stops working.

Economic policies can be compared to forestry management policies.  Bad forestry management (as practiced in the middle to end of the last century) tries to put out all fires – everywhere – all the time.  The result is that when a fire eventually happens, the dead wood and scrub brush fuel load is so high that the fire burns too intensely hot and destroys the forest.  Good forestry management requires an occasional (small) fire to reduce the fuel load.

Adequate risks and rewards serve this same purpose in the economy.  You cannot reduce the risk of failure (or any other personal catastrophe) to zero.  If you do, the accumulation of bad (dead) wood will burn your (economic) house down.  In addition, a vibrant growing economy, like a forest, needs clear access to resources (like capital) without the choking over-growth of underbrush, deadwood, and over-regulation.