The Homeless Recovery
The state of the US housing market continues to be woeful – but what does that really mean?
The latest evidence in a long stream of increasingly powerful indications that housing is plunging headlong into a double dip, was the data published on Tuesday for housing starts in June. These fell to a seasonally-adjusted annual rate of 549,000 units, including both single-family homes (the great majority) and multi-unit buildings. This was 5% below the level for May, of 578,000 starts – which itself had originally been reported as 593,000, but was revised down with the publication of the June data. The all-time record low in this series – which stretches all the way back to 1959 — was in April 2009, when 477,000 units were started. So although there has been a recovery from the trough, it has been a very minor one when you consider that the peak, in January 2006, was an annual rate of some 2.3 million units. After a ‘dead-cat bounce’ last spring and summer, the direction has basically been sideways for the last year, but housing starts are clearly heading downwards again.
This and other data lead an objective analyst, such as the author of the Calculated Risk blog, to the brutal but unavoidable conclusion that “the housing tax credit (which was worth up to $8,000 for house buyers and which expired April 30, PL) was a clear and unequivocal failure. Not only did most of the benefit go to people who were going to buy anyway, but the credit didn’t reduce the overall supply (the total supply includes both homes and rental units). The credit just incentivized some people to move – and pulled some sales forward – and to the extent the credit went to new home sales, it actually was counterproductive by increasing the excess supply. This is a textbook example of bad policy” (CalculatedRiskblog.com, item of 7/21/2010 08:55:00 AM).
There is, however, one positive aspect to the ongoing weakness in residential construction and that is that this sector has fallen so far and has been down so long that it can no longer act as a drag on the overall economy. At the peak of the housing boom, construction employed so many people and fed into so many other areas, from banking to furniture, that it punched well above its weight in terms of its contribution to growth. Now, its own weight has shrunken dramatically and it has little impact on anything else, so that further weakness in housing will not drag down the whole economy as it did in 2007.
But there are two sides to that argument, too – and the other side is brilliantly presented in an analysis on a site called Contrary Investor.com. I must admit that I don’t know who is behind this site – it seems to be an independent money management firm – but nor does it matter much. Not knowing who the writer is ensures that his (or her) analysis is judged purely on its merits, and in this case those merits are considerable. But just on the basis of the site’s slogan — “When everyone thinks alike, there isn’t much thinking taking place” — you gotta love it. In any event, the analysis in question is the site’s current “Monthly Market Observations”, and its title is the heading of this column — shamelessly plagiarised as the highest form of compliment. The full analysis can and should be read at www.contraryinvestor.com/mo.htm, but the summary of it is as follows. Using the National Association of Home Builders housing index numbers as a proxy for the state of the residential construction sector (which indeed it is), the analysis compares the behaviour of this index with that of other economic indicators in past recessions and recoveries. Those other indicators include consumer confidence, personal consumption expenditure, industrial production, auto sales, payroll employment and the S&P500 index – in short, a cross-section of the economy, covering consumption, production, employment and the stock market.
The basic finding is that in previous cycles, there was a strong correlation between the NAHB index and these other indicators, with the NAHB index usually leading both the decline and the recovery process. This time, however, all the correlations have broken down. Since the recovery began in March 2009, all the other indicators have shown considerable improvement – but the NAHB index has not merely failed to lead the pack, it has barely participated in the recovery. Hence the title of ‘the homeless recovery’. There has never, since the Second World War, been a recovery in which housing was not a full – and usually a leading – participant. Until now.
Can this anomaly last? Can the economy continue to recover without any input from housing? And if that doesn’t make sense, then isn’t the implication that all the other indicators will sink back to the depressed levels that housing has been stuck at for the past year? That’s how it looks to Contrary Investor, and to many other contrary investors who have reached the same conclusion but have perhaps not marshaled the evidence so thoroughly and presented it so impressively.