It's worth keeping an eye on the American housing market - after all, that's where the bubble developed and burst, and that's where the big trouble began, eventually encompassing the entire economy and then the whole world. The problem is that, at any rate at first blush, it's difficult to make sense of what is happening.
There's no need to look further than the most recent data, published this week, to become thoroughly confused. What is one to make of the fact that sales of existing homes are rising sharply and seem to be recovering well from the slump, while sales of new homes fell sharply and have barely risen from the lowest levels they plumbed earlier this year?
To the uninitiated this seems weird: If there is a recovery in the housing market, why aren't sales of new homes also going up? Conversely, if there isn't, why are sales of existing homes doing so well? And if there is an explanation for the apparent contradiction between the messages coming from the two sets of numbers, then what is actually going on: Are things getting better, or not, or even getting worse?
It turns out that there is logic in all this, but it definitely isn't straightforward. Why are people buying existing homes? Mainly because there are government incentives to do so (in the form of tax breaks). Many of the buyers are people with resources available, who don't need mortgages to make the purchase - which explains the disconnect between sharply falling mortgage applications and sharply rising numbers of house purchases. (Over the past two months the Mortgage Bank Association's Purchase Applications Index has fallen to new lows for the current crisis and is at its lowest level since late 1997.)
Indeed, many of the buyers are looking for metsias - i.e., houses offered at bargain-basement prices, often by banks that have foreclosed on the previous owners - which also explains why recent activity has been concentrated in hard-hit areas such as California's "Inland Empire" region.
The flood of existing homes onto the already swamped market is precisely why new-home sales are doing so poorly: builders can't compete with cut-price, second-hand stuff coming on the market, and they can't cut prices enough to match the near-giveaway levels that the banks will use to offload foreclosed properties.
The government incentives are not targeted on builders, i.e., supply, but on buyers in an effort to increase demand. It's working, albeit at very high cost to taxpayers, but it's doing nothing for new home sales, which actually contribute to economic activity because they represent residential investment and thus are part of GDP.
Buying an existing house, by contrast, generates no new wealth except fees and commissions for the middlemen. But it's important to note that an active second-hand housing market is critical for the economy in another context: it greases the wheels of the labor market by enabling people to move to where the jobs are (a major advantage of the American economy).
The result is that in November only some 25,000 new homes were sold - making it the worst November ever because the previous record low was 26,000, recorded as far back as 1966! Obviously, therefore, new housing starts are also very low because there's no point in building a lot of stuff that you will end up making a loss on. But many builders maintain a higher level of activity than is justified by the current state of the market, in order to hold onto their core teams and professional employees.
The positive side of this situation is that the inventory of new homes is falling. This is measured in months of supply: at the current rate of sales, how long would the number of unsold homes currently available last? This ratio has fallen to 7.9 months, from a peak of 12.4 months at the beginning of 2009, and is thus much nearer to a level considered normal, although it's not there yet.
The missing link in this analysis is, of course, the price level. This has now begun to fall again, in the latest measurements, after improving during the summer. Of course, the situation varies considerably by region. But, overall, the expectation of objective experts is that prices will fall again and, especially in the weakest areas, will fall below the previous low levels reached earlier this year.
In other words, they think the recovery that took place in 2009 was not well-based, and the final bottom has not yet been seen. This assessment leans on the expectation of another wave of foreclosures, which is probably now getting under way as millions of adjustable-rate mortgages "explode" - meaning their rate of interest rises sharply and borrowers can no longer make their monthly repayments. These borrowers will, especially if they are unemployed and/or the value of their house is below the amount of debt they owe on it, walk away from their home, leaving it to the bank to sort out.
To sum up, the American housing market remains in a very sorry state, with a huge overhang of excess physical inventory - because far too many houses were built during the boom - and an even bigger burden of excess debt. The latter will be passed from borrowers to lenders, threatening the stability and survival of many banks and ensuring that the property sector remains a drag on the overall economy for years to come.