US housing markets show sign of a slowdown
The news of the US housing market has been rumbling for some time now but it seems as if the bubble has finally burst. The fits well into Roubini's discourse and it must be said that the housing market in the US is showing clear signs of a bumby ride ahead for the US economy. To stay with Roubini for the time being he has a report here invoking the biggest slump in US housing in 40 years; real residential investment is falling and fast it seems...
'At this point there no doubt on whether the housing sector is contracting – real residential investment fell at the annualized rate of 6.4% in Q2. The first derivative of the housing market is clear and negative today and looking ahead for the next few quarters. There is not even a debate about the second derivative of the housing market as any estimate out there suggests that the housing sector will contract at a faster rate in Q3 and Q4 than in Q2. Some official estimates that I have seen suggest that real residential housing will contract at 10% - rather than the Q2 6.4% in the next two quarters.'
Roubini also argues that the tumbling housing market might very well be particularly salient this time around ...
'I have also argued before that the effects of housing on US economic growth and the role of housing in tipping the US economy into a recession in early 2007 are more significant than the role that the tech sector bust in 2000 played in tipping the economy into a recession in 2001. There are three reasons:'
Over at EconBrowser James Hamilton is also worried and he does not seem to believe that the Fed will come to the rescue this time faced with a inflationary supply shock from rising oil prices. The dynamics here are of course difficult to predict but once again it is feasible to imagaine a situation of 'stagflation lite' as Roubini has advocated where the Fed raises rates to fight inflation along side crumbling growth figures.
'No question about it, the housing downturn is here now, and it's big.
The Census Bureau today released their estimates for the number of new homes sold through July. On a seasonally adjusted basis, July sales were down 4% from June, which in turn were down 13% (logarithmically) from their average value during 2005.'
'So how bad is that? In the last 42 years (a period that includes 6 economic recessions), there was only one year in which we've seen a weaker December-to-July gain. The good news is that record year was 1994, in which the economy did not go into a recession, but instead was the prototypical "soft landing" which the Fed hopes to repeat this time.
Can the Fed pull it off again? In 1994, the economy was not under the strain from high oil prices that we're currently experiencing. And I continue to have concerns that as the perception sets in that home prices are falling rather than rising, we may see some significant shifts in consumer sentiment and budget constraints that could introduce a dramatic new dynamic to the current situation. Barry Ritholtz spells it out if you're looking for some more reasons to worry.'
(From the The Economist leader)
'The housing boom has been the main engine of America's economic growth in recent years. Indeed, it is the main reason why the American economy held up better than expected after the stockmarket bubble burst at the start of the decade.
This is the biggest bubble in American history: in real terms home prices have risen at least three times as much as in any previous housing boom. In the past average nationwide house prices have experienced year-on-year declines for the odd, isolated month, but they have not fallen on a sustained basis since the 1930s. However, most states have seen prices drop at some time in the past three decades.'
[The paragraph below has been amended from the original post to better conceptualize the idea of global imbalances in this specific entry]
If we stop to wonder this is also why the rest of the world cannot de-couple from a US recession and why a US recession cannot but influence other parts of the world. Since 2000 houses in USA have been the main engine for a strong consumption which has helped fuel the a huge current account deficit and helped keep those European and Chinese exporters hard at work. This is also called the global imbalances remember and although Europe might be wrong to mention here (Saudi petro exporters perhaps :)) a US slowdown is bound to have an effect if you as me believe in the fact that there is no-one to 'take over'. This fundamental element of the global economy might very well be changing now and this is why we are likely to feel the US slowdown elsewhere. I am not talking in the same severe terms as Roubini here but something is changing. See one of my previous post for more on these dynamics.
What we are now missing ...
'The boom has lifted the economy in three ways: it has boosted residential construction; it has made people feel wealthier and so encouraged them to spend more; and it has allowed home-owners to use their property as a gigantic cash machine, taking out money by borrowing against their capital gains.'
And on top as also reported by James Hamilton the Fed's hands are tied as long as inflation from external shock spills over into core inflation.
(From the Economist leader)
'If house prices do slide, the Federal Reserve will probably slash interest rates so as to save the economy from recession. But the Fed's ability to do this would be limited if inflationary pressures remain strong. And it would surely be wrong for the Fed to support the property market when a slowdown in spending is part of the rebalancing America needs to increase its saving rate.'
Dave Altig (once again) prompts the most ardent pessimists to take it easy and all in all I agree ... a balanced account is what we need. However, I do think the housing market needs to be watched very closely because its course might determine the severity of the US slowdown.
'Look. There is plenty of cause for concern, and plenty of uncertainty about the outlook. But to me it seems just a bit premature to be pushing the panic button.'