Housing and the Economy
2011 was the worst year for new home sales since the Census Bureau started tracking sales in 1963. The three worst years were 2011, 2010, and 2009 – and 2008 is also on the worst ten list. Although sales will probably increase in 2012, this year will probably be high in the list too.
I’m not surprised, really.
The economy collapsed because the housing bubble collapsed. The housing bubble collapsed because starting in 2007, a lot of adjustable rate mortgages made to lower-income families started coming due. (An adjustable rate mortgage is a mortgage which has a low fixed “teaser” rate (in some cases, 1%-2%) which then become an adjustable rate mortgage after 5 years, with interests jumping up in some cases to the 6% to 9% range.) Source, pg 8, figure 1.7, linked from here.
Well, here’s the problem: when the adjustable rate mortgages popped, a lot of people suddenly could no longer afford to make their payments. Suddenly the market was flooded with foreclosures. Home values dropped. And the real estate portfolios of a lot of banks suddenly shrank, making banks unable to loan more money–since what banks can loan is based on the size of their capital portfolios, and capital portfolios in the United States are generally dominated by single-unit residential real estate. Capital holdings shrink, what you can loan shrinks as well.
Now a lot of ink has been spilled as to who should be blamed for this mess. Personally I blame a mentality in 2005 that led a lot of people on the ground to believe real estate prices could not go down because of some “fundamental shift” in the nature of the housing market that didn’t exist. By believing housing prices could only go up but never go down (except perhaps in specific markets due to local forces that overwhelm a global trend), a lot of people made a lot of bad decisions–including bad policy decisions, bad loan decisions, bad banking and regulatory decisions–which exacerbated the disaster.
But here’s the thing: we may not be spilling a lot of ink on the housing crisis and ARM resets. But they’re still resetting. See here, for example.
So long as ARMs are resetting, there is a persistent drag on the economy. Granted government actions have done a lot to reduce this from a nuclear bomb to a forest fire, the forest fire is still burning.
And as you can see from the link above, resets will remain high, though tapering off, through to the end of 2012. Which is why I’ve always asserted if we see a recover, we’ll see one around Q1-Q2 of 2013, after the ARM resets have finished, after the backlog of homes have been sold, after the housing market (which represents a sizable percentage of small business activity in this country) has recovered.