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The Fed's Failure: U.S. New Home Sales Back to 1960s Levels

Housing-Market / US Housing Jun 04, 2015 - 06:12 PM GMT

By: Harry_Dent

Housing-Market By Rodney Johnson : A problem with most humans is that we’re really bad at letting go of what happened yesterday. So too with nations. When estimating potential threats, it’s easy for leaders to adapt to whatever happened in the latest conflict, developing their military accordingly.

Think of the U.S. after World War II. We built up land forces across Europe to guard against an invasion by the U.S.S.R. Later on in Vietnam we dove into jungle warfare, where tanks and mass forces were less useful. We were set up to fight the last war, not the next one.


In our economy we do the same thing. We develop economic policies and responses that work great, as long as history repeats. When things stray from the script, we run into problems.

For six long years, the Fed has been fighting the last war.

In an effort to bolster the housing sector after the subprime crisis, the Fed has held rates at record lows to make debt cheaper. At the same time, it gobbled up trillions of dollars’ worth of mortgage-backed securities, hoping to free up new capital to buy newly originated mortgages. The hope was that by getting the housing market back in gear, home builders would crank up production, and hundreds of thousands of new, middle class jobs in construction would appear.

But something strange happened on the way to economic recovery. Housing didn’t bounce right back. In fact, the housing market kept falling for two more years as excess supply and the heavy weight of mortgage indebtedness worked through the system.

When real estate finally turned around in terms of prices paid and units sold, the gains weren’t exactly stellar. And as recent reports show, new home sales are growing, but not very quickly. The annualized rate of new home sales in April was 517,000 units. That’s a far cry from February 2011’s level of 270,000 homes sold — the lowest in 50 years. But it’s light years away from July 2005’s staggering 1.389 million.

The Fed must be looking back at the mid-2000s with envy. However, today’s rate of new home sales isn’t the outlier; the high rate in the mid-2000s was. After recording of new home sales began in 1963, they averaged 512,000 units through the rest of the 60s, then 656,000 in the 70s, and fell back to 610,000 in the 1980s. As the boomers plowed into the market in the 90s, new home sales jumped to 700,000, then took off with a bang in the 2000s with an average of 1.105 million per year.

Among those data points, which one doesn’t belong?

So far this decade new home sales are averaging 382,000 units per year. Even when you consider the low rates of sale in 2010 and 2011, the move up from those years has been gradual.

The waning demand for new homes has naturally affected residential construction employment as well. Between mid-2006 and January 2011, that employment number dropped by almost half from just over one million, to 557,000. It’s picked up since, growing to 694,000 in April of this year, but is nowhere near what the Fed must have been hoping for as they printed trillions of dollars to prop up the sector.

It’s been clear for some time: By targeting housing with monetary policy, the Fed has been fighting the last war. They pinned their hopes for an economic rebound on a resurgence in home building that would flow through to employment, leading to the creation of middle class jobs. Instead, we experienced a rebound that simply brought building back near the long-run average of previous decades, excluding the bubble years of the 2000s.

Unfortunately for the millennial generation, who should be buying homes at a fast clip as they settle in for family life, many of the new homes coming to market are high-priced units. The average price of a new house in April was $297,000 — four times the average income of an American household.

With strict lending rules in place regarding debt-to-mortgage ratios, the new homes hitting the market today aren’t exactly geared toward the younger generation. They’re made for older workers with more income, or the thin slice of the millennial generation that can qualify for a home loan.

Either way, a spike in homebuilding doesn’t seem likely in the near future, which will keep a lid on employment in the sector, and continue to foil the plans of the Fed.

By Rodney Johnson, Senior Editor of Economy & Markets

http://economyandmarkets.com

Follow me on Twitter @HarryDentjr

Harry studied economics in college in the ’70s, but found it vague and inconclusive. He became so disillusioned by the state of the profession that he turned his back on it. Instead, he threw himself into the burgeoning New Science of Finance, which married economic research and market research and encompassed identifying and studying demographic trends, business cycles, consumers’ purchasing power and many, many other trends that empowered him to forecast economic and market changes.

Copyright © 2015 Harry Dent- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Harry Dent Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


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