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.

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david_zerohedge's picture

However, in a sense, though, the solution is not obvious. Survey, DC, and 75 or 80% of the elite that the country is on the right road, but 805 or gen'l people even think that we are in the wrong way.

David, guide on jobs for 16 year olds

minus dog's picture

This is like one of those lousy Godzilla movies...  the government talks a big game, sends in the big guns, expends a mountain of ammo, and the dust clears to reveal...   Godzilla, who then uses his thermonuclear breath to melt a bus full of nuns.

tom's picture

The slight increase in average house prices is a result of bottom-fishers pulling out of the market, in anticipation of further price declines. The proportion of low-end homes in the data shrank, while the proportion of high-end homes in the data grew. This is widely reported in real estate media.

tahoebumsmith's picture

If you don't have enough qualified buyers to buy the homes the prices will just keep falling. Look at the median household incomes across the country, average is about 58k. This means that the average American can only afford a 265k house with 20% down! We got a long way to go. If you look at the realestate prices back to 1999 in any area, this is where you will find the bottom for that area. It doesn't matter how hard they try to prop it up. Unless they introduce their next box of creative mortgage tools, there will be very few sales above 300k as the past year has already shown us.This means there is no move up sales either, only first time buyers and investors taking advantage of a good deal on an empty home. 1999 is the magic number...It's a hard pill to swallow so make sure you have a big glass of water! And" for For those market boosters who are prattling on about the possibility of a “jobless recovery,” I offer an invitation to join me for a breakfast of “fat-free bacon,” “eggless omelets,” and “no-carb bread.” As unappetizing as such a meal may sound, it would nevertheless offer more substance than the oxymoronic concept of an economic resurgence without job creation"....Peter Schiff 2009


Djirk's picture

I was a youngster but still remember the CA housing bubble of the late 80's, my stats are a little rusty but I believe housing prices were flat until the income boost of the dot-com boom lifted them. So it would be reasonable to expect at least 10 years with declining or flat prices. Unless incomes magically grow before then.

bronzie's picture

I'm targeting 1998 prices in San Diego but that doesn't allow for an undershoot to the downside (study bubble dynamics if you don't know what I'm referring to)

Some very interesting concepts involved in financial bubbles and their bursting:

> ALL financial bubbles burst - that's right, ALL - name one that hasn't (naming current bubbles doesn't count)

> when a bubble burts, prices retrace ALL of the bubble territory and then overshoot to the downside (use this guideline to determine a possible target in your local sub-market - determine when the bubble started in your area and that is the retrace point - then add some more to allow for the overshoot)

> when a bubble bursts, people will stay away from the previously bubbly asset category for a FULL generation - the generation following the bubble doesn't understand the dynamics of the bubble inflating and bursting, all they know is that there was great hardship  that occurred because of real estate - so that generation avoids real estate as an investment category - interestingly, Martin Armstrong's timing models show real estate in a downtrend from 2006 until 2032 - that's 26 years or one full generation - and Martin doesn't use bubble analysis to build his models

cmalbatros's picture

"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." - until they realize that they won't be able to sell their property.

bronzie's picture

" until they realize that they won't be able to sell their property"

they won't try to sell until they realize that the rosy rents they based their 'investment' on weren't all that realistic to begin with and then rents dropped significantly below that 'realistic' level

welcome to the 2nd Depression all you foreclosure 'investors'

geno-econ's picture

That evil word "Protectionism "is returning with a vengance and for good reason. The US unemployment situation is caused by global economic policy , not just domestic policy.  What most do not understand is that "temporary" protectionism under WTO rules are permissable. Quotas and tariffs to prevent import surges, local content rules under certain circumstances,  maintanance of a balanced economy, military and national  security reasons, health reason, balance of payments problems , etc.

Keynesiasm has not been effective and we are running low on options.

Of coarse the danger is losing US$ status as reserve currency ,but the naked truth is "the emperor has no clothes" that he can any longer afford .

The choices are not attractive which is probably the reason our heads are in the sand-----something will give soon or  sooner 

Djirk's picture

Now for something completely different:

Since QE didn't work, I recommend a dose of QT, some tough love.

Fed should short the equity and commodity markets!

Driving the equity markets down would create valuations with a better price to free cash flow. The corporations with their war chests of cash would kick off a buying spree. Not only would this give some support to equities. You would create tons of jobs for over paid "synergy" consultants, M&A banksters and systems integrators.

Lower commodity prices would improve corporate profits and increase spending on value added products.

Same thing for the housing markets. Let the values drop, the savers, vultures and those still employed would jump in when the rent vs ownership ratio favored ownership. This would aslo create demand for services and durable goods.

If done correctly by a managed and messaged tightening and keeping the banks liquid for operational capital it just might work.

Keeping balance sheets propped up by printing money obviously ins't fooling people into expecting asset growth.

Sure this would kill the historic GDP measurement. But I have always been an advocate of purchasing power and productivity as true measures of economic growth.

Or we could keep beating our heads against the wall?

RockyRacoon's picture

Fed should short the equity and commodity markets!

Perfect.  Not that maneuvering in this market isn't hard enough.  Get the Feds involved to screw that up as well.  Your sarcasm is appreciated.

Widowmaker's picture

Good read until I got to "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."

Good luck with that, speculators will be crushed, "it's ok, it was just an iceberg, i saw guys with buckets, its under control..."

There still exists systemic fraud of epic proportions lurking in Tier III mark to your butthole accounting.

LauraB's picture

+1 "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."

That's when I stopped reading ... and moved on to the comments.

old_turk's picture

Thank you for a well researched and thoughtful post.

The DC crowd kicked the can down the road ... to nowhere.

I just cannot see how you can cure a debt crisis by increasing debt.

It just does not work.

After all, we all live on the margin and production and productivity are the keys.

MarketTruth's picture

RE resets greatly peak once again in September. Jungle mail followed by 'QE2' coming soon to a bankster near you.


PS: And CRE is going to get ugly too.

overmedicatedundersexed's picture

solutions to our economic blight are obvious,

unless you work at the Fed or SEC or in DC.

tariffs - BK of insolvent banks - no foreign aid

yep "protectionism"that dirty discredited word band by Ivy league as evil incarnate

expanding existing energy production IN USA - nuke, oil, coal and nat gas.

recall military from most bases overseas

massive tax reduction and elimination of

dept of energy, education..and more.

no legal or illegal immigration..until UE is under 5%

we will not do any of the above until the current crop of socialist zombies have driven the usa into 3rd world status..

fascism  ala germany post WWI, will most likely be the outcome of not doing the above.



BobWatNorCal's picture

In one sense, though, solutions are not obvious.
Survey results show that DC and the elites are 75 or 80% believing the country is on the right path, whereas 805 or more of the gen'l public think we are on the wrong path.

Cyrano de Bivouac's picture

Agree. I don't think a politician has proposed a reduction in miltary spending in 40 years. A good example of useless spending was the B1 flying dud.

Kayman's picture

A cabal of New York criminal bankers, a few "internationalist" corporations, and the Washington elite prostitutes already have turned this country into a Fascist state.

Even Goebels would marvel at the brazen propaganda. 

AssFire's picture

Agree with the above, but need to address the welfare freeloaders...

1 - Fire 95% of the military= savings $ 750 billion/year

2 - Close 95% of the prisons= savings $ 200 billion/year; keep only the most violent offenders (they were simply slaughtered during the French Revolution); repeat offenders to be used as slave labor to generate revenue for the state

3 - End "war on drugs" = savings $ 150 billion/year

4 - Legalize & tax Marijuana = revenues of $ 100 billion/year

5 - Fire 75% of government employees = savings of $ 500 billion/year; invest only in education and infrastructure

6 - Lower income tax to 18%, (25% above 2 million/yr)

7 - Quadruple investment in education (qualifiers being ability- not race)

8 - Reinstate the modern poll tax- no vote unless you pay taxes. (or at least pass the flat tax- and the tax applies to free benefits from the Gov.)

9 - Sterilize or refuse benefits to welfare recipents if the have already had a child on welfare.

10 - Shut down the mainstream media & shut down the US Congress for five years

The bottomline is there are just too many non-contributors working harder at obtaining benefits and freebies than they ever worked in a job.

MrBoompi's picture

I'm with you except #s 6, 9, and 10.


Taxes need to be much higher on the top earners than what you suggest.


Sterilization and shutting down MSM and Congress for 5 years is crazy talk. 


"Benefits and freebies"?  You make it sound like being on welfare is a non-stop party.  Maybe you oughta try living on food stamps for a couple months.  We will always have a problem with the chronically unemployed, but the rest would prefer to work if the jobs were there.

tony bonn's picture

"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."

good article with the right conclusion. monetarism and keynesianism are economic quackery and should be burned with a boat load of banksters.

AssFire's picture

Oh shit, you mean we actually need to create/build something of value other than the dollar itself?? How Austrian.

And then there's this jewel from the biggest cheerleader in "news":


(no shit?- welcome to the planet)