Housing: Getting Worse While Getting Better

Much was made of the new housing statistics. Sales of new homes nationwide jumped by 4.7% in February. Sales of new homes rose to a seasonally adjusted annual rate of 337,000 last month. It was a fine example of the headline obscuring the news.

The housing situation is still bad enough that current inventory, as of the end of last month, represents a 12.2-month supply at the current sales pace compared to the 9.2-month supply of February 2008. And, February’s sales were down 43.8% compared with February 2008. But, some observers called the 4.7% improvement a sign that the residential real estate is at the beginning of a recovery.

As MarketWatch pointed out, Government statisticians have low confidence in the monthly sales report, “which is subject to sizable revisions as well as large sampling and other statistical errors.” Even if the numbers are relatively correct, that still does not answer the question of whether housing is showing a feeble sign of recovery, or if sales of homes are simply bumping along a bottom and may reach a point where they take another sharp drop.
This is the sort of trap that economists and investors find themselves in now. Data, like the new durable goods information, is not as bad as was expected, but it is still, on an historical basis, nearly as bad as it gets. It is unimaginable that in some large cities and parts of states the values of homes have fallen by 50% since their 2006 peaks.

The temptation is to give in to optimism and believe that February was the bottom of the deep turn down. To believe that an analyst has to figure that unemployment will keep rising for a few months, but the general economy has begun what will almost certainly be a slow recovery.

But, two other things happened that were not as prominent in the headlines. Both were indications that the clouds are not blowing away and that, for the time being, they may be getting thicker.

Federal Reserve Bank of San Francisco President Janet Yellen expressed doubts that an economic recovery would begin before 2010. Many economists would view a real recovery starting in a year or less as very positive. But, Yellen made two qualifying points. She said unemployment will remain high through 2011. The other is that deflation is a risk if the economy does not begin to have a stronger pulse soon.

Not long after Yellen’s comments, The Treasury auctioned five-year notes and the demand was not as high as expected. The hint from that low demand is that the market sees huge auctions coming as the US funds the hundreds of billions of dollars worth of deficits that it will rack up over the next few quarters. With the market flooded with the paper investors are going to want a much higher yield on the debt the Treasury issues. The current low demand is a signal that the US government is going to pay more dearly each time it wants the next dollar.

If the housing market is getting any better, it is not by much. So, if analysts, economists and investors choose to look at the February housing numbers as an early sign of recovery, they should put it into the context of almost certain agreement among the experts that joblessness will rise for another year or even more. Increasing unemployment will not be good for housing sales no matter how low prices go. And, borrowing for housing may become even more difficult than it is now. If Treasury yields have to go up to allow the federal government to raise the money it needs for its growing list of recovery programs, then virtually every other interest rate is going to go up as well. If mortgage rates have  not seen a bottom then it is hard to see how the housing market has.

Douglas A. McIntyre