Wednesday, November 24, 2010

housing hangover: don't hold your breath on a speedy recovery

Despite the protestations of some acquaintances who were once in investment banking, this is going to be a long and slow recovery. The Fed's efforts (QE2) to lower mid- and long-term interest rates, even if successful, will have limited impact.

Why? Housing.

Increased housing construction has historically been important in recoveries from recessions. It won't be this time. It won't be even if mortgage interest rates fall.

Why? Housing.

Historically, housing construction is the most interest-rate-sensitive component of spending in the economy, but not this time. The housing construction boom of a few years ago left us with a lot of houses. Speculation and low lending standards led to a lot more than the usual number of new houses being built. Now we are stuck with the surplus. Since houses wear out rather slowly, we'll be stuck for a long time.

The first chart with the blue bars shows how the inventory of unsold houses has skyrocketed from the early part of the past decade.

The second chart's red line puts the existing housing inventory in terms of the number of months it would take to sell them. 11 to 12 months of inventory is a lot. This is not a good sign.

Even if the houses sold, we would still have an awful lot of houses selling at low prices. Prices that will stay low for years. Lowering mortgage rates won't cause people to desire to pay for new houses if the supply of existing houses is large.

A Policy Proposal. What can the government do? A three-step process: 1) Speed up foreclosures; 2) have the Fed buy up about eight or nine months of the inventory of unsold houses; and 3) then burn those houses to the ground.

A modest proposal, yes?

Without that happening, don't expect a quick rebound from the Great Recession.

Be blessed.

[ Source for charts]


Anonymous said...

And what about the homeless? - I note you refer to a Christ based world view - just wondering what you think Christ would think of your modest proposal?

RB said...

Hmm...what did you think of Swift's Modest Proposal(the link in the third line from the bottom of the post)?

Philippines Nightlife said...

i couldn't agree more. This recession is in for the long haul. Just like the pre-WWII recession, we are trying to buy ourselves out of debt, and that never works.