The Housing Recovery and the Law of Small Numbers
Small numbers make the recovery look bigger than it is
The current housing recovery is a mirage wrapped inside a delusion. We have rising home prices, rising stock prices and a falling unemployment rate. Sounds great.
There is a disconnect, however, between the gains in the stock and housing markets and the overall economy. Existing and new home sales are way off their highs of 6-8 years ago and the labor participation rate is at a 33 year low.
Yet, we hear an incessant drone from the main stream media about a housing recovery and an economic recovery. Almost any piece of economic or housing data is seized upon by the media economic recovery addicts as evidence of economic recovery. If the data can’t be spun in a recovery friendly manner, the weather is blamed.
The reality of the economic situation is far different than we are led to believe. New home sales are at historically low levels and the number of jobs being created, especially four years into the supposed recovery, is anemic.
Any improvement from the low level of home sales or any increase in the puny number of jobs created is hailed as further evidence of recovery. If you have very little, a little extra seems like a lot.
When the temperature goes from 3°F to 6°F, it’s twice as warm but still frigid.
Here is how small numbers are used to spin the story of a recovery in housing:
Housing – Low sales, Low inventory=Higher Prices
The recovery in housing is in price alone. Home prices have been bid up not due to rising demand because more people are working and making more money and can afford houses, but rather because there are few homes for sale. There are few homes for sale as nearly 40% of the United States housing stock is occupied by people whose mortgages are underwater or at a level that it would not make economic sense to sell given the transaction and relocation costs. These home “owners” are underwater mainly because they purchased their homes during the last housing bubble engineered by Greenspan’s Federal Reserve low interest rate policy and the issuance of mortgages that had no business being made other than to be sold to Fannie Mae. In addition, the too big to fail banks are still holding back on selling the millions of homes that they have foreclosed upon as they continue to receive favorable accounting treatment.
Against a backdrop of few homes for sale, there are few buyers. Sales of existing and new homes are at multi-year lows and sales to first time home buyers on a percentage of these low home sales are at historic lows. Home prices have risen in this low sales, low demand environment because investors have been taking advantage of Bernanke’s (and now Yellen’s) Federal Reserve no interest rate policy. Investors have bid up the limited housing inventory as they chase higher yields by either buying and flipping homes or converting them into rentals.
As a result of this dynamic, home prices, in some metropolitan areas are getting close to or have exceeded their mid 2000′s housing bubble price levels. Rising home prices are cheered on by the media and the Fed as a sign of an ongoing housing recovery and of economic growth. Yet there is a dark side to rising home prices. Rising home prices have a built in ceiling as incomes and wages are not rising anywhere near the recent surge in home prices, making homes unaffordable, especially for potential first time home buyer millennials. Fewer new homes have been sold in the past few years than in any period since the 60′s and 70′s. Higher home prices will ensure even fewer homes will be sold.
But, if inventory remains tight, home prices can rise again in 2014, even if demand and sales fall, proving small numbers can create big returns. Thus, the underlying strength of the poor housing market can be obfuscated by rising prices.
As we showed in “Why the Housing Recovery is a Farce – Illustrated by Two Charts”
This chart shows the abysmal number of new homes built in the past few years. News reports like to tout the large percentage increase of new homes built from prior recent years. The chart below, however, shows that these increases are coming off historically low new home construction numbers. Indeed, fewer new homes have been built in the past three years than during similar periods in the 1960′s and 1970′s when the U.S. population was approximately 36 and 28 percent lower, respectively.
Employment – Unemployment Rate Drops as People Leave the Labor Force
The unemployment rate is down to 6.7% from its 2009 high of 10%. Yet, there are fewer people as a percentage of the population attached to the work force than were before the start of the Great Recession. (the home ownership rate is also lower*)
The law of small numbers allows the media to also spin the employment numbers like they do the housing ones.
The Bureau of Labor Statistics released the non farm payroll numbers last Friday. They came in at 175,000 new jobs created. That was up from 74,000 jobs reported in December and 129,000 reported in January. The 175,000 was above expectations, so the stock market cheered and marched higher. Yet 175,000 new jobs does not a recovery make. Last February 2013, the non farm payroll number was 236,000. That comparison was not the focus, rather the increase from the 129,000 jobs in January was the headline. The February increase in jobs created, beamed the Wall Street Journal, was achieved in spite of the bad weather!
With a less than robust job market, who will buy the homes to sustain the housing recovery? That is a question not worth answering as the benchmark for measuring an economic and housing recovery is rising home prices which can be achieved without rising home sales or rising employment or wages but rather by keeping interest rates and inventory low.
Scarcity is the New Abundance
As we noted in our predictions for 2014, the economy is characterized by scarcity and making comparisons from low numbers. From smaller numbers its easier to create bigger ones.
Perhaps a stock market crash, perhaps will put an end to all this recovery talk.
* www.census.gov/housing/hvs/files/qtr413/q413press.pdf (cut and paste)
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