Housing and Jobs: The Underlying Problems Are Re-emerging

Econophile's picture

From The Daily Capitalist

Existing Home Sales

Today's report that existing housing sales plummeted 27% in July should not come as a surprise.

Consider the fact that we are coming off of the greatest boom-bust credit cycle in world history. The focus of that cycle was residential housing which resulted in massive overbuilding of homes. Now we are seeing the inevitable result of the housing boom — the housing bust which requires the liquidation of this malinvestment.

From 2001 to 2006 housing starts jumped 40%, from about 1.6 million units per year to 2.250 million units per year. That period coincided with a massive expansion of the money supply by the Fed. When the cheap money stopped, the ride ended, and projects that, but for the cheap money were unprofitable, went broke.

The liquidation phase is never pretty but it is necessary for recovery. And that is why the government has been unable to prop up the housing market, except temporarily though tax credits. You can't push a string as they say, and the inevitable process of liquidation is continuing after the tax credits expired in April.

According to the National Association of Realtors report, demand for existing single-family housing dropped to a 15 year low. The 27% drop was the biggest one-month drop since 1968. Sales dropped 29.5% in the Northeast, 22.6% in the South, 25% in the West, and 35% in the Midwest. June sales figures were revised downward to 5.26 million homes from 5.37 million previously reported.

Courtesy The Wall Street Journal

The important existing inventory index increased to 12.5 months from 8.9 months. Which means it will take a year to sell off existing inventory, a substantial jump and a significant problem for the market. Normal inventory is a 4 to 6 months supply. While prices had appeared to have stabilized (median home prices rose 0.7% to $182,600 in July) because of the tax credits and speculator competition for foreclosure sales, this inventory glut will put negative pressure on prices. Ultimately I believe foreclosure speculators will create a floor under prices (based on the level of activity I have seen), so I don't think the downside will be drastic.

Jobs Reports

Last week's report on initial claims showed a MoM jump of 25,000 claimants, a 6% increase over the previous week. The 500,000 claims was a 9-month high. Initial claims had dropped to 439,000 in February, 2010, then flattened out showing a stalled recovery, and has been climbing since July.

A brighter statistic was that continuing claims were down 13,000 for the week of August 7. The four-week average is 4.527 million, the lowest since the peak in March, 2009.

Courtesy The Wall Street Journal

The bulk of job cuts have been in small companies:

Businesses with fewer than 50 employees accounted for 61.8% of all job cuts in the private sector in the fourth quarter, the Labor Department reported Wednesday, while they created 54.1% of new jobs. Small companies employ roughly 29% of all workers.

 

The numbers represent a reversal of the situation a year earlier, when small businesses made up a larger share of jobs added than of jobs lost. Small companies made up half of all jobs lost at the end of 2008 but also accounted for 53.9% of job gains. ...

 

Companies with 50 to 249 workers made 17.8% of all job cuts in the fourth quarter, and nearly the same percentage of job gains. Midsize companies, with 250 to 999 employees, added 9.9% of new jobs and accounted for 10% of job losses.

 

The largest companies, those with 1,000 or more employees, hired a larger share of workers than they let go. These firms, which employ about 38% of all workers, accounted for 18.3% of all job gains versus 17.7% of job losses.

This graphic gives a good picture of job activity by company size:

courtesy Wall Street Journal

Courtesy Wall Street Journal

The job situation is weakening again because the underlying problems are reasserting themselves after the Fed and the government tried to paper over the problem with monetary and fiscal stimulation. Those policies have failed and underlying issues remain: local and regional banks' balance sheets are still tied up with bad loans related to commercial real estate, slow liquidation of excess housing, falling consumer demand, increased personal savings, deleveraging by consumers and companies, and business uncertainty caused by major legislation.

These factors have resulted in a limitation on lending, a lack of credit demand, a declining money supply, and deflation. The government has done everything in their monetarist-Keynesian playbook to prevent a resolution of the underlying problem, but it only delayed recovery, making it worse for those who are unemployed. And that is why unemployment will rise further until these underlying problems are resolved.