Suppose my analysis is wrong, and we actually have a "double-dip" recession? How bad is it likely to be?
I wanted to put up a much longer discussion on this, but frankly I don't have the time right now. One important point, however, is to look at housing. Housing historically has been a long leading indicator ( 6 to 12 or even 15 months ahead of the economy as a whole). Bill McBride a/k/a Calculated Risk has pointed out a number of times that he did not expect the unemployment rate to drop that much, because it correlates quite well with housing starts - with a lag - and housing starts have gone more or less sideways for two years. The relationship going back 50 years is shown in this graph:
(Note: unemployment rate is inverted, right scale, better to show the relationship)
As I have previously pointed out, housing starts also correlated very well with job growth in the 1920s and 1930s as well. But if the correlation holds true, than the inverse also holds true also. That is, if housing starts have not declined, then we should not expect the unemployment rate to grow very much in any double-dip, either. A ceiling of about 10% or so in the next 6 - 12 months on the unemployment rate based on housing present status is certainly a valid estimate.
And the housing market shows no sign of any meaningful accelerated downturn. To the contrary, new home sales data for July showed that the months of supply of houses on the market has dropped to 6.6 months. With the exception of a very brief period during the artificial support to housing of the $8000 tax credit, this is the lowest months' of housing for sale since the onset of the recession almost 4 years ago:
(courtesy Calculated Risk)
With no further goverment stimulus at all, this metric has declined by 2.5 months during the last year. It is not unreasonable at all to believe it could drop below the long-term average of 6.0 months during the next year.
This week Housing Tracker reported that YoY asking prices are only down -2.3%. One quarter of all metro areas tracked are now reporting YoY increases in asking prices.
In my opinion the bottom in nominal housing prices (as opposed to inflation-adjusted prices) is much closer than almost all analysts suspect. Once we start to get an upward trend in housing, then according to the correlation with the unemployment rate, there should be good fundamental support for job growth. Housing simply does not support a substantial double-dip.
6 comments:
Wouldn't it go the other way around? Once we get job growth, there should be good fundamental support for an upward trend in housing starts?
I agree the house inventory is low. There have been some reports that banks are artificially depressing inventory by not listing all their foreclosed houses at once or by bulldozing some houses instead of putting them up for sale.
Looking at some of the dogs that are for sale, it is hard to understand the difference between those and the bulldozed houses.
In any case, the banks' actions keep inventory artificially low and house prices from reaching their natural bottom. House price equilibrium should be the level where a median income can afford a median turn-key home. Houses prices are still too high.
Anonymous 9:28 cogently noted:
“Wouldn't it go the other way around? Once we get job growth, there should be good fundamental support for an upward trend in housing starts?”
That’s the thing with correlation there is no implied causation – which variable is ‘causing the other to move’ or more than likely there are many other variables affecting the measured variables. That’s why statisticians developed such techniques as ‘factor analysis’ and ‘multivariable analysis’ in an effort to locate the most significant variables affecting the system.
The question is: what has to happen (what variables change) to make housing and employment go up and down? For example, where there any agreements this week between Joe Biden and the Chinese that will impact housing and employment? For example, GE announced that it has entered into an agreement to provide avionics to the Chinese commercial airplane manufacturers – will that affect housing and employment?
Best
Tom
Anon at 9:28 a.m.: Housing leads employment. That's what the data shows. First housing moves, then employment moves. The explanation is that as the volume of new houses built increases, not only do more contractors have more work for more employees, but afterward the new homeowners buy furniture, kitchen appliances, landscaping, and doodads.
Which also responds to Anon at 10:27 a.m.: We can argue if housing changes are directly causative or not, but unless employment is clairvoyant or has a wayback machine, employment changes are not causing housing changes.
Anon at 9:41 a.m.: Yes, but those same foreclosure issues existed last month, and the month before that, and the month before that, and the month before that. And despite that, months' inventory is declining and asking prices are getting more and more firm YoY.
The thing I take away from this is NEW home inventory is slowly declining. No surprise because builders have been cutting back for 3 years or so. The banks have foreclosed on EXISTING homes. So unless the chart showing new home inventory was mislabeled, the bank foreclosures are a non factor in this discussion.
Wildcard time again... Hurricane Irene.
A huge chunk of the American housing market (nevermind the population) is at grave risk of damage or destruction in the next week. How will homeowners react to that when so many of them are already hanging on to those "underwater" homes by their financial fingernails.
High hurricane deductibles, coupled with mass capitulation, could lead huge numbers of those distressed homeowners to finally walk away once and for all.
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