This week we have seen various real estate releases. What these releases are whispering is that the headwinds are abating – but in perspective, the real estate industry remains a mere shadow of its former self. One of the reasons for the sluggish USA economic recovery is due to real estate:
- decimated the net worth of real estate owning consumers;
- flooded the market with distress properties needing quick sale putting downward pressures on home values (and appraisals): and,
- removed from GDP residential construction.
Real estate is not the only reason for the sluggish economy – but was major contributor to the perfect storm – the Great Recession of 2007. Real estate in 2012 is transitioning from a headwind to a neutral or slightly positive influence on economic growth. However, because of the huge contraction of real estate prices and new construction, it places the economy deep into a hole.
It likely will be years (decades) before real estate feels healthy. Take a look at the jobs picture in residential real estate construction. Jobs, a non-financial indicator, is the best snapshot of understanding the current influence of home construction on the economy.
Building permits are the fuel for the new residential real estate construction. When there are more residential building permits issued than completions, we can understand that at some time in the future completions will rise.
Existing home sales volumes are improving after recovering from the withdrawal of the first home buyers tax credit in 2010. Sales volumes must continue to grow before prices can be expected to stabilize.
Home prices are yet to show real improvement other than the artificial improvement seen during the government’s stimulus programs for first time home buyers.
Admittedly, I am stretching when establishing the trend line but with foreknowledge of home prices from Altos Research – I am comfortable predicting this trend, and believe, unless a black swan occurs, home prices will be stable or slightly improving before mid-year 2012.
Stable real estate prices will stop degradation of homeowners equity throttling mortgage delinquencies, short sales and foreclosures – effectively removing the major downward pressure on home prices. Foreclosures and short sales normally sell at a discount to existing appraisals – and re-establish appraisals at this new level. Low appraisals limit the mortgage amounts.
2012 should be the end of the Great Real Estate death spiral.
Other Economic News this Week:
The Econintersect economic forecast for March 2012 continues to indicate a growing economy. This index essentially uses non-monetary measures (counting things) to determine economic growth or contraction. Several of this index’s components draw on transport industry movements.
ECRI has called a recession. Their data looks ahead at least 6 months and the bottom line for them is that a recession is a certainty. The size and depth is unknown but the recession start has been revised to hit around mid-year 2012. This week on the ECRI website, another defensive explanatory post of their recession call. What caught my eye as I have long discussed this issue:
Most data, both public and private, are seasonally adjusted. But the nature of the Great Recession seems to have had an unexpected impact on the statistical seasonal adjustment algorithms that are hard-wired to detect when the seasonal patterns evolve and change over the years. This is normally a good thing, but when the economy fell off a cliff in Q4/2008 and Q1/2009, it was partly interpreted by these procedures as a lasting change in seasonal patterns. So, according to these programs, data from Q4 and Q1 would be expected thereafter to be relatively weak, and therefore automatically adjusted upwards. Our due diligence on this subject indicates a widespread problem, resulting in many recent economic headlines being skewed to the upside.
Econintersect has long hit at the failed seasonal adjustment methodology being used by various agencies. Econintersect evaluates growth based on non-adjusted data.
This week ECRI’s WLI index value continues to be less bad at -0.4 – a negative value but the best index value since August 2011. This is the ninth week of index value improvement. This index is indicating the economy six months from today will be weaker – but increasingly marginally.
Initial unemployment claims essentially fell from 353,000 to 348,000 – a number last seen in March 2008. Historically, claims exceeding 400,000 per week usually occur when employment gains are less than the workforce growth, resulting in an increasing unemployment rate. The real gauge – the 4 week moving average – fell from 356,250 to 355,000. Because of the noise (week-to-week movements from abnormal events AND the backward revisions to previous weeks releases), the 4-week average remains the reliable gauge.
The data released this week which contain economically intuitive components (forward looking) were mixed – rail movements, industrial production, and container counts. Rail traffic year-over-year contraction reported for the fourth week in a row is troubling since it contains declining components normally associated with a declining economy. Core manufacturing continues to show slightly positive growth trend lines. Container imports contracted over 12% – import declines are associated with recessions.
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Bankruptcies this Week: Neurologix, TaxMasters and TMIRS Enterprises, Elpida Memory, Arcapita Bank