(photo credit: Ariel Jerozolimski)
"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 to 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 last summer and expired in November. It succeeded in boosting sales and
activity generally and thereby ended the slide in prices.
program’s impact was so artificial 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 reemerge. Consequently, another program
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
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 programs 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, which is 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
number: an effective all-time low. The last time that number was seen
1963, when the population and the economy were both much smaller. In
terms, the May 2010 number was 18 percent less than the 367,000 annual
May 2009, which was itself some 22% below its own year-earlier
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%
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
month from their original estimates, by as much as 50,000 sales in each
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
last month – shot up from 5.8 in April to 8.4 months in May and looks
There was plenty more bad news from the housing market in
recent days: Mortgage applications are slumping, and sales of existing
opposed to new) homes slipped in May, after the rises through April
with the government benefits.
The administration’s reaction to all this
will likely be to put together yet another package of incentives, but
support for this kind of thing in Congress and in the country at large
In the background, the pace of foreclosures is rising again, as
mortgages sold with very low “teaser” rates of interest come up for
higher rates, which many borrowers will be hard-pressed to afford. In
it’s déjà vu all over again.