Housing Permits, Starts, Recessions and the Economy
Again, Professor James Hamilton posts some very interesting data that doesn’t bode well for the economy. The first graph is of housing permits
The next graph is of housing starts.
Now I haven’t done any statistical analysis, but just by “eyeballing” the data it looks very much like housing permits and starts are somwhate correlated with the business cycle. This makes some sense because we can tell the following reasonable “story” about why this should be the case. When housing permits and stats fall that is an indicator that housing prices are falling or about to fall. This decrease in housing prices results in a (negative) wealth effect for many people. That is they cannot use the equity in their house for consumption spending. This contraction in consumer spending (consumer spending is a large component of the economy) could very well be large enough to send the economy into recession. Now this isn’t the only variable at work here which is why we have seen other declines in housing permits and starts without recessions. Still, when there is a recession, it does look very much like it is associated with a decline in housing starts and permits. The big question is how strong is the relationship in the other direction? That is, when housing permits and starts decline percipitously, how likely does that make a recession? For example, there is a large decline in housing starts in the late 1960’s that is not associated with a recession. Also around 1994 or so there was another decline that was as large as the decline around 1960 that also is not associated with a recession.
Prof. Hamilton’s take on the data,
It is hard to find an example of a decline of this magnitude that wasn’t associated with a recession. We saw something comparable in 1987-88, though my view is that the 1987-88 housing downturn left the economy weak enough that the oil shock of 1990 then tipped us into a recession. For a really convincing example of declines of this year’s magnitude that did not produce a recession, I think you have to go back 40 years to 1966-67.
Translation: this decline is not good. It may not mean a recession, but that outcome is looking less and less likely (well at least that is my take on his comments).
Then there is Calculated Risk’s prediction about the jobloss implications of this kind of decline (that also becomes stable and does not continue to decline for the next several months). The bad news, 600,000 private construction jobs lost. The good news…uhhhmmm there really isn’t any. The Big Picture also has some information on the potential for loan delinquencies. Here are some of the disturbing statistics,
- 70% of borrowers who took out pay-option ARMS in the past year have loan balances larger than their initial loan.
- Homeowners face higher payments as mortgages are reset. Generally, monthly payments rise between $200 and $500 depending on the size of the mortgage.
- According to Reality Trac, August foreclosures were up 23% over July and 53% over a year ago.
President Bush keeps saying that the economy is strong and that the tax cuts have done their job. The problem is, for how much longer is this going to be true and how hard is the landing going to be? My own view is that the notion of a “soft landing” is quite unlikely.