Perversions
There are two clear perversions that are sullying the housing sales data currently. First, there is the tax credit for first-time home buyers (that morphed into a credit for any home buyer, and will probably eventually become a tax credit for anyone regardless of whether they bought a house at all. But I digress). This clearly should stimulate sales, albeit at the cost of future sales since obviously the tax break isn’t likely to increase the aggregate number of houses that people buy (one per customer, usually) nor the frequency with which people move.
The other effect is the “distressed property overhang” consisting of people who want a higher price to sell, people who would sell at current prices if the bank were to approve a “short sale” and release them from the balance of the mortgage, and bank REO (“real estate owned”) that is liquidated when the bank is able to find a market and willing to take a hit writing down the asset.
But the “distressed property overhang” obviously only affects existing homes. I suppose there are some ‘distressed new housing developments’ out there, but the mortgage defaults happened only on homes which are now “existing homes.”
Today, the pace of New Home Sales declined to something near last year’s lows, while Monday’s Existing Home Sales data retraced some but still was pretty strong (see Chart, source Bloomberg):
Appears that the tax break didn't do much
It looks to me as if the factor that was working on both of these, the tax break, is to blame for the road-bump in NHS, but the spike in EHS is due to the distressed-seller effect.
That’s not bad news. It shows that some of the overhang is starting to clear. But it means we should look to New Home Sales as a better measure of the natural pace of property turnover right now, and the 342K pace we had last month would have been the second-lowest recorded since at least 1963 (there was one print 338K in 1981) if we hadn’t had a few even-lower prints last year. Housing is still very sick, regardless of how Existing Home Sales are turning over.
Speaking of perversions, the President will speak tonight on the new definition of the phrase “spending freeze.” It is a political masterstroke. By calling a spending freeze after the budget deficit exploded, the Administration can set the “fiscal responsibility” bar at a certain level simply by defining it with such words, and then easily clear that bar. What is more, it will make the Republicans look like they want to crash the economy when they call for spending “cuts” from this bloated level. And Paul Krugman is calling (here) this a “betrayal of everything Obama’s supporters thought they were working for” and saying that “Obama has embraced and validated the Republican world-view.” I guess Obama’s supporters were working to make government spending 100% of GDP and the Republicans are satisfied with what, 50%?
With any luck, someone will point out that a spending freeze two years ago would have been a lot more impressive.
Notice I didn’t say anything about the Fed meeting today. That’s because nothing important happened.
Tomorrow, Initial Claims (Consensus: 450k, as economists pray the spike to 482k was mostly a perversion due to weather) will be joined on the tape by Durable Goods (Consensus: +2.0%, +0.5% ex-transportation). Ordinarily, Durables would have a better chance of moving the market but if ‘Claims surprises on the upside by very much it will give bonds a nice boost and pressure stocks. Investors are already nervous about the housing data, the turmoil in Europe, and tighter policy in China. Each additional piece of data that is weak, even a little, will tend to make them more nervous.
(P.S…How many hits do you think this blog will get just by using the word “perversions?”)
