“It” is the housing market crisis in the US. Readers with exceptional powers of recall, stretching back as much as three years, will remember that in the summer of 2007 trouble began emerging in the American mortgage market; this was the harbinger of the wider global financial crisis burst. The bubble in the US housing market had actually burst much earlier – prices topped in early 2006 and began falling in the second quarter of that year, so that by late 2006-early 2007 the ‘toxic’ mortgages given and grabbed at the height of the boom were beginning to explode.
The rest is too well-known to need detailing. Housing prices collapsed and those toxic mortgages, packaged into exotic instruments and sold around the world as first-class debts, caused the entire edifice of excessive debt — on which the global economy was precariously perched — to crumble. However, a series of measures taken by the US government succeeded in putting a floor under the economy in general and under the real-estate market in particular and sparking a recovery in 2009. The first major package of benefits, offering tax rebates and other goodies to house-buyers, went into effect in last summer and expired in November. It succeeded in boosting sales and activity generally and thereby ended the slide in prices.
But so artificial was this programme’s impact that, as its deadline for expiry neared, it became clear that its termination would trigger a further sharp fall in sales and activity and that the crisis would re-emerge. Consequently, another programme was introduced; it, too, had the desired effect of boosting activity as buyers sought to take advantage of the subsidies provided for them by Uncle Sam.
In passing, it’s worth noting that several economists have calculated that the cost of these incentive packages to the taxpayer was very high and probably exceeded the extra revenues generated by the additional activity – but that depends very much on how you calculate the direct and indirect impact of the programmes on economic activity, including jobs as well as direct sales of housing. More fundamentally, economists protested that so gross an intervention in the housing market would merely paper over the problems – primarily, the existence of a huge overhang of excess housing, built during the boom – and, by ‘kicking the can down the road”, the government was simply extending the duration of the housing bust and slump.
We now know that this assessment was correct. To be precise, although there was an accumulation of evidence over the last several weeks, as of Wednesday we can be certain that the housing crisis is not over and never was. It is officially back, big time. The key data released on Wednesday in this connection were the number of new home sales for May. I will start with the actual number, which is rarely mentioned but is nonetheless important: 28,000 new homes were sold in May, a record low for the month, easily surpassing the previous record low of 34,000, which was written into the books in …May 2009. The record high, by the way, was 120,000 in May 2005 – that’s how far the peak-to-trough of the boom-slump cycle has come, so far.
Those numbers are ‘raw’, i.e they are not seasonally adjusted – that’s why they only relate to May. The numbers receiving the widest publicity are the seasonally-adjusted annual rate (SAAR) data, which showed that the annual rate of sales in May was 300,000, taking into account the relative strength of May versus other months. This is the correct way of crunching statistics, but the result is the same as the crude number: an effective all-time low. The last time that number was seen was in 1963, when the population and the economy were both much smaller. In these ‘SAAR’ terms, the May 2010 number was 18% less than the 367,000 annual rate of May 2009, which was itself some 22% below its own year-earlier comparison.
Another way of looking at the number is ‘sequentially’: In May the sales rate of new homes was 300,000, which was a massive 33% below the 446,000 rate of April as well as the 389,000 in March. But what is truly shocking is that those figures for March and April were both revised down this month from their original estimates, by as much as 50,000 sales in each case. In other words, sales were not as high as thought even during the benefit period, but when that ended on April 30, sales collapsed completely. Consequently, the ‘months of supply’ measurement – how long it would take to sell the current inventory of new homes, at the rate of sales of last month – shot up from 5.8 in April to 8.4 months in May and looks set to climb higher.
There was plenty more bad news from the housing market in recent days – mortgage applications are slumping and sales of existing (as opposed to new) homes slipped in May, after the rises through April faded along with the government benefits. The Administration’s reaction to all this is likely to be to put together yet another package of incentives, but the support for this kind of thing in Congress and in the country at large is waning rapidly. In the background, the pace of foreclosures is rising again, as mortgages sold with very low ‘teaser’ rates of interest come up for resetting at higher rates, which many borrowers will be hard-pressed to afford. In short, it’s déjà vu all over again.