New Home Sales Cut in Half

Taking a quick look at that graph, one should be able to eyeball that the percentage drops were equally as large in the the periods 1972-1975, 1978-1982, 1986-1991. What is potentially breathtaking is that only the 1972-1975 plunge occurred over a similar time-frame, generated in large part by the first oil shock from the OPEC oil embargo. This plunge has been pushed by nothing like this other than the rot within the system itself. Further, assuming that this “stumble” lasts as long as they typical decline, just how far does it go before finding a bottom. We could be sailing pelagic financial waters at this point with only the abyss below.

what if they lower rates and no body borrows the money, or the sub-prime crowd are the only ones who take the bait.did’nt greenspan have rates at one% for almost a year before the economy started to pick up.

Randy,
That’s sort of an issue. Everybody knows that Fed rate actions take forever to have an effect and Bernanke keeps hinting that the economy will be stronger in a year than it is now… but he and other Fed govs who have spoken seem much more tuned in to daily events and seem to be reacting almost wildly to daily headlines. Maybe they don’t know their mission? Maybe they think they are ‘players’? Maybe things are on the edge of disaster and they just don’t want to be blamed? Time will tell.

The chart starkly shows how inescapable recession has been every time housing has declined in the past. (Not clear whether ’66 was a decline and recovery or, as in ’80, a cyclical spike in a secular decline.)

The question seems to be not if, but when. The problem for investors is that it is impossible to know either (1) whether recession will begin early or late in the housing decline, or (2) where the bottom in housing is.

Early or late? In ’70 and ’80, recession began when housing bottomed. In ’75 and ’90, recession began about halfway through the housing decline. Assuming we’re at least approaching the halfway point in this decline, recession could begin now. But it could begin on the late side, leaving time for a bit of sucker’s euphoria.

Where’s the bottom? Past cycles peaked at 800k and bottomed at 400k, a 50% decline. This time it peaked well over 1200k. Any of three vastly different scenarios could play out: (1) this decline could resemble past declines in percentage terms, in which case we’d be near a bottom at 600k; (2) this decline could resemble past declines in absolute numbers, in which case we’d have to drop another 50% to 400k; or (3) this decline might have to exceed past declines in percentage and absolute terms, because it peaked so far above past cycle peaks.

Given all the uncertainties, it seems impossible to form a reliable opinion about investments’ safety or expected return.

One more word to the wise: Do not equate the bottom in housing activity (permits, starts, completions or sales) with a bottom in housing prices. In the past, prices did not make a final bottom until years after housing acitivity bottomed.

This is interesting – but how about an overlay of price declines. I am astonished about how sales are cratering…but (at least here in Washington DC proper) prices are *not* falling much if at all.

Speaking of revenue drop… how bout my buddy the ex mortgage loan consultant for wamu. 2003-2004 $~250k. Today $2000/month Unemployment. Good thing his wife has a steady job as a teacher.

Lewis, your prediction is really no surprise. The Fed followed the same practice in 1976, which is one of the things which led to the inflation and high interest rates which bedeviled Jimmy Carter’s Presidency. Does anyone remember the “misery index” besides me? I predict we’ll be seeing a return of the “misery index” next year to describe the effect of what Helicopter Ben is doing, because inflation has no way to go but up given the nick in the femoral artery the dollar will be suffering under his supervision. The Fed might be cutting rates, but the banks will need to raise their rates to counteract the loss of foreign funds flowing into the system. This will not be pretty, with the specter of the Reichsbank looming in the shadows.

Or we could vote for Ron Paul, and end all the foolishness at once…

HT, population does not appear to have affected the data much over time. The numerous cycle bottoms from 1965 to 1990 were all around 400k. There is no upward channel.

The likely reason is that these are only new homes, which add to the stock of existing homes. If population growth is steady, then the rate of new home sales can be steady too.

Also, note that these are only single-family homes. If more people chose to live in urban apartments, that would reduce the need for single-family homes, despite an overall increase in population. Don’t know if that’s been the case.

TKL,

It is what they are TRYING to do. It ain’t foolproof, as I said, because with politicians, well, you are dealing with fools. And what happens when you have that event, a recession in an election year, your party gets thrown out of power big time (white house minimum, capitol hill usually), which is the biggest political no no of all. Plus I think you missed the last one, because from memory the George Bush senior economy was tanking in his final years, maybe not technically a recession, but he got pounded for it in the campaign, and he got tossed too (“It’s the economy, stupid” was the great quote from that one). The point isn’t what actually happened, it is what they were trying to make happen (and when it fails, they undoubtably blame the dark science folks).

And I think the current gang at the white house is pulling every lever they can, although I think there aren’t enough levers available. I personally like the idea of the 2008 Bush tax cut surge to overcome the recession insurgents (tongue DEEP in cheek on that one).

Lewis