Another report points to a double dip in housing, this time for new home sales. Mortgage Applications are down.
The Fed, the administration, and various other economists have noted that a recovery in housing is key to a sustained economic recovery. The key to housing, however, doesn’t appear to be any single thing. Housing remains unaffordable (despite improvements around the country). Unemployment remains high. Debt overhangs loom large. But these things are all connected. We can’t work off our debts without jobs. We don’t plan on sustainable jobs growth without a sustainable recovery. We don’t plan on a sustainable recovery without a housing recovery. About the only thing not directly connected to that mess is affordability. Unfortunately, that’s political (and economic) dynamite. We can work on affordability through inflation, though falling prices, or through a general increase in wealth. Of course, the last of these has the problem of being circularly dependent upon the very thing it’s trying to solve (unless we’ve committed a semantic error where a general increase in wealth is not tautologically dependent upon a sustained economic recovery). The other two, if too volatile, re-establish the interconnectedness of the preconditions with their consequences.
We need a recovery in housing for an economic recovery, but the keys to a recovery in housing are dependent upon an economic recovery. There are two obvious ways that this cycle can be broken. The first is through liquidation. That’s very fast and the pain is sharp. The second is through time (slow inflation and slow home price drops meet at the affordable price at some point). That’s very slow, and the pain is chronic. As evidenced by the fact that economic busts seem to occur in any country independent of policy, we don’t really have a lot of control over which path we take, but we expend an impressive amount of resources trying to convince ourselves that we can always move to the slower path. At the same time, we attempt to convince ourselves that shortcuts exist on the slower path. While policy may help us bias our trip on the slower path, the fact that housing was so central to our country’s wealth for so long makes our quest for shortcuts almost absurd. However, we will muddle through, at least on the path(s) away from this problem. It’s the other problems in front of us that I worry about.
As I write this, I also have open the current FDIC Quarterly, which includes an article, “Measuring Progress in U.S. Housing and Mortgage Markets.” Unfortunately, the data predates the releases of new data pointing to a double dip. It has a lot of pretty charts, so you might want to look at it anyway.
