The major debate regarding the economy centers on the real estate/housing picture. Last week a headline in the Financial Times read, "Housing Data Not as Gloomy as Bears Think." The article went on to say that house inflation in both the UK and Australia declined to zero, yet nothing bad resulted. Price inflation held low in both places for three or four quarters, and then inflation started up again. In both the UK and Australia central banks have since raised their rates. No disasters there.
The latest issue of Business Week adheres to the same optimism, with an article that's headlined, "Housing: The Roof Won't Collapse on the Economy. As builders adjust their inventories, other sectors will offer plenty of support."
I think I'm feeling better already. But wait -- the most intelligent piece I've read regarding housing comes from that brilliant economist, Paul Kasriel, of Northern Trust Global Economic Research. Kasriel notes that the figures for July show that new family homes sold were down 22.2% from July a year ago. At the same time, New family homes for sale in July were up 22.4% from a year ago. The spread between the two was 44.6%. By this measure, states Kasriel, the supply/demand situation for new single-family homes was the worst since July 1972.
Kasriel notes that falling prices for new single-family homes will put pressure on existing home prices, and therefore we can look forward to a decline in residential home construction. Downward pressure on existing home prices will lead to increased mortgage defaults as home-owners may find that the new payments on their variable-rate mortgages amount to more than the declining value of their homes.
posted by jason @ 6:59 PM
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