Weekly Review: Housing Bottom Distorted by Stimulus?

An image of stocks on a display
Credit: Shutterstock photo

Two and a half years ago, I did an article on Seeking Alpha (first article under author's photo) using the work of economists Carman Reinhart and Kenneth Rogoff who have done several studies predicting how our current housing crisis will play out.

Their study predicted a return to 2003 housing price levels based on modeling the top 5 global banking crisis recessions.

This week the Case-Shiller home price data for June 2011, the latest available - released August 30, showed a year-over-year decline of 4.5% but it was being compared against stimulus effected data. See second article under author's photo.

The June 2011 index is 104.2 (Case-Shiller reindexed to Jan 2003 = 100). According to the study, the home value collapse was modeled to be over by this year. But here is one case that a stimulus may have screwed up our ability to understand what is going on.

Econintersect has reported that a Federal Reserve Cash-for-Clunkers Study found that stimulus was ineffective where inventories are involved. The study specifically included a conclusion that the First Time Homebuyer Credit was ineffective:

These findings suggest an additional caveat regarding many stimulus programs designed to give a temporary boost to spending (the recent First Time Homebuyer Credit is another example): Spending is not the same thing as output when inventories are involved; even if the desired increase in expenditures occurs, inventory reductions may undercut the broader impact on GDP.

In the case of housing, the stimulus screwed up the data. Is the housing price crisis behind us? - unlikely, but it is closer to the end than the beginning. But it just makes you mad when money is wasted on an ineffective stimulus - and it clouds your ability to trend the data.

This post was written before the release of the August 2011 BLS Jobs report. I have written in the past weeks about recession markers - and a zero jobs growth is definitely a recession marker. This week my colleague Doug Short penned a telling piece (third article under author's photo) on the current economic situation and concluded:

Since the beginning of quarterly GDP data, which has been tracked since 1947, the U.S. has never had an official recession without having achieved new highs in Real GDP and nonfarm employment. Let’s hope that record continues. But ultimately the debate over recession boundaries is a minor quibble in the ongoing economic reality of The Second Great Contraction.

The reality is that the 2007 Great Recession never ended, and was wallpapered with stimulus that covered up the still unresolved economic issues. To even think this is a double dip or new recession is ridiculous - the economy remains trapped in the Great Depression 2.0.

Economic News this Week:

The Econintersect economic forecast for September 2011 forecast the economy will contract - but there is an indication that the economy may begin slight growth in the coming months. The the majority of the weighted elements were negative, but some key elements were showing positive growth.

This week the Weekly Leading Index (WLI) from ECRI slipped further into negative territory - from -2.1% to -4.3%. In theory, a negative number implies the economy six months from today will be worse. This index has been eroding and has been in a four month overall downtrend. This index's value of between 1.6% and 2.1% since the end of June 2011 held until August when this new downward trend began.

This week, ECRI's has been making the rounds explaining what is going on in his index and the economy.

Initial unemployment claims fell 12,000 (from an upwardly revised 421,000) to 409,000. Historically, claims exceeding 400,000 per week usually occurs when employment gains are less than the workforce growth, resulting in an increasing unemployment rate. The real gauge – the 4 week moving average – rose 1,750 to 410,250 because of the backward revision. Because of the noise (week-to-week movements), the 4-week average remains the reliable gauge.

The data released this week confirms the economic soft spot is continuing. If current trend lines remain, price inflation will begin to moderate over the next few months.

Bankruptcies this Week: Nutrition 21, Solyndra

Click here for the following table with active hyperlinks.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.