Almost three years into the housing downturn (remember Housing Starts first turned negative in January 2006), the inventory of new homes for sale is finally starting to adjust in a meaningful manner.
Take a look at the picture below. As is typical during any stock adjustment, inventories rose during the first few months of the downturn. What is not typical is the behavior of the stock of unsold homes over the next 18 months. Inventories of homes for sale did not decline whatsoever, on average, between January 2006 and the summer of 2007.
Of course, as we have learned with so many series during this recession, falling to a low level does not mean the series is near the bottom. I don't have a crystal ball, but we can look at the series during previous downturns and make judgements about where it is likely to end up in this downturn.
Here is a long time series of houses for sale.
Housing inventories have a long way to go before they finish their adjustment, but the end may be in sight. If the number of homes for sale continues to fall at its 2008 average pace, the inventory of unsold new homes will hit its bottom (maybe 250k?) in March 2010 or in about 16 more months.
I am assuming that inventories only need to fall as far as they did during the 1982 downturn. As of right now, this recession looks worse than that one so it may have to fall farther but this number feels right.
The number of months left seems very large. That is why inventory overhangs are such a problem--remember the fiber optics networks in 2000. But, even if I use a much larger number for adjustment, we still need several months to work through the excess. For example, if I use October's monumental fall of 8 percent, the inventory adjustment takes another 6 months. No way am I that optimistic.
There is a silver lining, however, even in the 16-month adjustment scenario, my base case.
Housing starts stop falling long before the inventory adjustment is complete (see chart below - starts are the jagged black line). In every previous housing-market downturn, housing starts stopped falling about one full year before the inventory of new homes reached its bottom.
And, once housing starts stop falling so does the labor market. This means in about three months (four more labor reports), sometime in the very early spring, the labor market will stop getting worse: we will reach the worst of the month-on-month declines. A few months after that employment will start growing again. According to this forecast, we will see positive job growth as soon as next summer.
Does this mean the recession is going to end in mid-2009? Maybe.
Maybe not. All of the above is predicated on this downturn looking something similar to all of the other post-war recessions. The gorilla in the room right now is the large number of foreclosures. These foreclosures are adding to housing inventory in a manner very similar to new housing (they are empty and must be sold) and the number of foreclosures is at record levels. Therefore, these estimates may be wildly optimistic. My guess, and it is nothing more than a guess, is that the foreclosure crisis is good for about 4 to 6 months extra adjustment.
We shall see.
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4 comments:
The US economy is challenged at the stock not flow level. The US workforce growth rate has been declining in trend since the 1970s. Inflation peaked in the 1970s as the surging workforce constrained the level and growth rate of capacity. Leverage rates were low. As global capacity built and the US trade deficit surged, so too did leverage. The trend decline in inflation (disinflation) was accompanied by a trend increase in private sector leverage which was backed primarily by housing.
The boomer have never been able to constrain the global economy for very long. Now with large balance sheets and excess inventory in housing, excess capacity in homebuilding and a dearth of buyers to sell to due to demographics, the trend in leverage has come to an abrupt halt.
The trend in falling inflation however has not stopped and will intensify cash flow in the economy collapses. Yes housing will bottom at some point but when it does volumes and prices will be much lower than in the past. As the household sector delevers so too will Wall Street. The underwriting cycle associated witht the US consumer is over.
The Northeast corridor of the US is now set for a significant decline in real estate prices. Given the weight and importance to the overall US economy, GDP will be worse than what most expect.
As finance shrinks to historic / more normal proportions of the US economy, US income will be under significant pressure. First the loss of financial sector jobs willbe permanent and incomes are way above the national average and secondly, the employed workforce is going to shrink.
Cashflow will not only take a hit from vanished private sector borrowing but the income component will also take a hit. Real prices need to continue to fall.
The workforce growth rate (adjusted for unenmployment and participation rate) is roughly at 1% per year. A key marker of recessions in the past is when this series collapses to zero. Has not happened yet signalling another down ward demand shock.
The output gap is still open.
The Fed has to move to negative rate policy for the soveriegn bond market to allow rates to fall to expected levels of deflation.
The increase in market cap is a reward for savers but also forces savers to consider at what point do they switch back into private assets.
The risk free rate can be negative. The risk free rate simply guarantees you will get your money back, the level of the return is determined by the market.
The US economy has an enormous debt burden and weak growth in final demand as the boomers are aging. Negative rates is a marketcap solution to quantitative easing not a explicit liability based expansion the spenders dream of. An increase in market cap not increase in liabilities is needed. Deflation is a natural process. Why fight it? Just as rates must rise above inflation to contain (create an alternative to being in private assets), rates need to fall below the expected rate of deflation to compel savers back into private assets.
So where do future jobs come from is "financial sector jobs are gone" and manufacturing jobs have been shrinking for almost ten years?
Health Care is the next natural bubble in the US economy. The leading edge of the boomers is now 63. Health care is a natural growth business. Furthermore, the workforce is likely to shrink in coming years as people exiting the workforce exceed new entrants. Workforce growth peaked in the 1970s when boomers were young. The economy does not have to generate alot of jobs to keep the unemployment rate stable.
Health care and the surrounding industry are entering a very natural growth bubble.
How fast is the workforce going to shrink? The Secret Economist seems to think we are going to lose another million jobs this year alone.
How many manu and fin jobs are there? Surely more than there are old people. Unless you think that the economy will be so bad that people might retire earlier.
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