Monday, August 28, 2006



Two recent items caught my eye. Offered without much analysis, because that's what I have time for:

With the economy beginning to slow, the current expansion has a chance to become the first sustained period of economic growth since World War II that fails to offer a prolonged increase in real wages for most workers....

The median hourly wage for American workers has declined 2 percent since 2003, after factoring in inflation. The drop has been especially notable, economists say, because productivity — the amount that an average worker produces in an hour and the basic wellspring of a nation’s living standards — has risen steadily over the same period.

As a result, wages and salaries now make up the lowest share of the nation’s gross domestic product since the government began recording the data in 1947, while corporate profits have climbed to their highest share since the 1960’s. UBS, the investment bank, recently described the current period as “the golden era of profitability.”

At the very top of the income spectrum, many workers have continued to receive raises that outpace inflation, and the gains have been large enough to keep average income and consumer spending rising.

Sales of previously owned homes plunged in July to the lowest level in 2 1/2 years and the inventory of unsold homes climbed to a new record high, fresh signs that the housing market has lost steam.

The National Association of Realtors reported Wednesday that sales of existing homes and condominiums dropped by 4.1 percent in July from June to a seasonally adjusted annual rate of 6.33 million. That was the lowest level since January 2004.
The latest snapshot of housing activity was weaker than analysts anticipated. Economists were forecasting the pace of sales to fall to 6.55 million.

The inventory of unsold homes in July rose to a record high of 3.86 million. At the current sales pace, it would take 7.3 months to exhaust that overhang. That is the longest period to exhaust the supply of home since the spring of 1993.
And anyway, what analysis do you need? It doesn't take a John Bates Clark Medal winner to put these two together.


Chuck Butcher said...

The median wage is down 2%, check the lower end of wages and see how far down and for how long.

Housing relates to another end of the spectrum and it doesn't have to do with income constriction, fear is fatal to housing. The localized bubbles also play into those numbers. Mortgage rates haven't gone high enough to hurt the market other than downsize houses a little and the income bracket that's buying new houses is doing ok with income, but insecurity is setting in.

BTW, that's where I make my living, banging nails.

Jeff Alworth said...

The housing slow down will have pretty enormous consequences, whether or not it's a gentle landing or a crash. It will precipitate a whole cascade of related events. You're on one end--construction. My dad was a roofer during the 70s and 80s, when the market was dead, and he practically gave his labor away free.

Then there's construction materials, which with no buyers, will hit the skids, affecting another sector.

Much of the middle-class's wealth during the past decade came through home ownership as wages stagnated, falsely inflating the sense of prosperity and fueling consumer purchases--two-thirds of the nation's economy.

Add the forces sending wealth in the opposite direction--mortgage defaults that lead to repos that further glut the market--and things could get ugly for a lot of folks.

Chuck Butcher said...

I was there since early 70s, it stunk in the 80s. Sky high mortagage rates guaranteed a crash in the 80s, things are different this time around. You bet there are going to be ARM problems & intrest only problems, the foreclosure rate is bound to go up. It is also a good thing to remember that Banks don't want to own houses, they'll try pretty hard to avoid it.

I hope the "house as investment" idea is dying, home ownership is a huge commitment and homes are still a good buy, the rates are moderate, materials are moderate, and labor is dirt cheap. If the market corrects houses will be a bit smaller and the 2nd house and investment house will go away quite a bit, that's alright. If panic sets in, oh boy. It really doesn't take much to kill the housing market when emotions get a reason to get out of hand.

The ripple effect could be bad, but there are material shortages already which might mitigate that. There is also the consideration that a lot of materials are foreign produced. (primarily Canadian)

As someone who deals with owners frequently I can say that the emotional content of buying/building a house is huge and that part is what scares me. Perception is a critical part of this market, nobody wants to lose, and when it's that big of a commitment that drive is amplified.