Housing Still A Drag
This week has seen the release of several housing market indexes and, unfortunately, showed little in the way of positive outlooks. Before we get into the charts and numbers it is important to remember that housing, on many levels, is a very important driver of the overall economy. From construction to maintenance, furnishings to landscaping and lending to taxes; a home touches just about every aspect of the American economy in some shape, form or fashion. There is a very high multiplier effect from housing through the economy which is why every economic recovery in history has been led by housing. With housing and strong domestic manufacturing sitting on the bench the team on the field has little chance of scoring.
On Monday, the National Association of Home Builders index was released for September and it fell to 14 from 15. Of course, it was no surprise that it was well below the consensus estimate as usual, but coming in at 3 month lows and the second lowest level of the year should make you pay attention. However, what wasn't talked about in the media was that three-fourths of all regions posted as decline and sales expectations, as well as buyer traffic, declined as well.
This data series has a very tight correlation with both starts and sales so we may well see lower levels in those indexes in the months to come. With all of this in mind it is important to take a closer look at the chart. During periods of economic recovery the index runs closer to 60 - we are currently at 14. During normal business cycle recessions the index clocks in around 28. Did I mention it was at 14? This level is half of what it is during normal economic contractions and you should be scratching your head when analysts tell you we aren't, or won't be, in a recession.
As stated above, the NAHB index released on Monday has a very high correlation with home starts. Therefore, it wasn't really surprising, except again to analysts, that home starts came in worse than expected as well. Even with historically low interest rates on 30-year mortgages, the lowest in almost 50 years, potential home owners are not in the market. Why, because they are already trapped in a home that they can't sell, are delinquent on their current mortgage, or can't qualify for financing to start building a new home. Furthermore, with a weak economic environment and high unemployment potential buyers are reluctant to take on new credit obligations for fear of unemployment. These fears, lack of mobility, low household formations and tight lending standards are crushing buying attitudes and consumption.
This is one of the primary reasons why the Fed's attempt to lower interest rates from here with "Operation Twist" will likely prove futile in spurring the home market. If you can't launch demand from interest rates already at 50 year lows - it is highly unlikely that another half percent decline will make any difference.
This continues to be the "balance sheet" recession that we have discussed at length many times in the past. In a balance sheet recession the deleveraging of the debt burden acts like a cancer on the consumption cycle by diverting discretionary income away from consumption into the reduction of debt. While long term it is critical that this occurs to return the economy to a healthier state; the near term effects are deleterious. With the government now focused on spending reductions, which further reduces the money flowing into the economy, the risks of the next recession continue to rise.