SHOULD WE LISTEN TO ECONOMISTS? May 29, 2009

BEING STREET SMART

Sy Harding

SHOULD WE LISTEN TO ECONOMISTS? May 29, 2009.

The problems for the economy began with the bursting of the real estate bubble in 2006, and spread into sub-prime mortgages, then into the entire financial sector, and finally into the overall economy.

At each step of the way economists of Wall Street and the Federal Reserve were in denial. They assured investors in the beginning that housing was not in a bubble, that there were still many people who did not own their own homes, and so there would be strong demand for many more years.

When the housing bubble burst anyway they said the problems would be confined to the housing sector, and provided many reasons why that would be the case.

When the housing collapse immediately decimated the sub-prime mortgage market, they said the problems would be confined to housing, and the sub-prime mortgage market, which had its own unique risks.

When it was discovered - to their supposed surprise - that the entire financial industry, from banks and brokerage firms, to hedge funds and pension plans, were heavily invested in sub-prime mortgages, (which became ‘toxic waste’ as there was no market for them anymore, freezing up the entire banking system), they said it would have a serious effect on the financial sector, which would need significant government help, but would not spread to the overall economy.

When it spread to the overall economy they said the economy would slow some, but not all the way into recession.

When they finally had to admit last fall that the economy was already in a recession that had begun in December, 2007, they began moving to the opposite extreme, with projections that the economy was spiraling down into the next Great Depression becoming fairly common.

Wrong again.

Next, with the temporary improvement in retail sales and home sales in February, and the coining of the phrase “green shoots appearing in the economy”, the pendulum swung swiftly to the opposite extreme, with the economists of Wall Street and the Fed soon projecting that the economy is already bottoming, and the media is spreading that word far and wide.

What a dizzy and emotional stream of errors, not small errors, but errors of major magnitude.

So, please excuse me if I apply a healthy dose of skepticism to the tale they’re telling now.

Basically it is that, although very negative economic reports have returned after the brief February/March respite, they are still a sign that the economy is bottoming and about to recover, because the numbers are really bad but ‘less worse’ than they were in the winter.

Meanwhile, I have said from the beginning that the problem began in the housing industry and the recovery will begin in the housing industry.

So let’s update the information, facts not fiction, from the housing industry.

What we see is that the Housing Market Index, which measures the confidence of home-builders, rose to 16 in May from 14 in April. The index is on a scale of 1 to 100, so 16 is a miserably depressed number. It is being sold as “builder confidence is on the rise, since the number shows the highest level of builder confidence since last October (when the Index was at 14).

A more honest comparison is that it is even below the range of builder pessimism in the first six months of last year, when builder sentiment was collapsing. The index over those six months ranged from 18 to 20. In that context, it’s difficult to rate the ‘improvement to 16 in May from 14 in April as builder confidence being on the rise.

No wonder builders are depressed. This week it was reported that new home sales rose a marginal 0.3% in April from record depressed levels, with new home sales down 34% from a year ago. Keep in mind that a year ago sales had already plunged double-digits over the previous 12 months.

And this week the Housing Price Index showed house prices declined again in May, now down 18.4% from a year ago. And a year ago they had already plunged double-digits over the previous 12 months.

Several months ago the government began providing first-time home-buyers with an $8,000 incentive bonus to get out there and buy a house. That can amount to more than the entire down-payment for buyers making the minimum 3% down-payments available on the lower priced homes that are the majority of sales that are being made.

Yet existing home sales rose only 2.9% in April, about half of what economists were forecasting. But by far most of those sales were ‘short-sales’ or sales of foreclosed homes to first-time buyers.

But the really bad news in the report was that even with the 2.9% increase in sales, the glut of unsold homes grew by a big 9%.

And it is not just low-end housing that is in trouble. Homes priced above $700,000 are selling so slowly that there is now a 40-month supply at current sales levels.

The story doesn’t end there. This week it was reported that the number of foreclosures rose by a new record in the 1st quarter in spite of the moratorium on foreclosures that Congress imposed on the major banks (which has now been lifted). Meanwhile mortgage delinquencies jumped by a record amount, indicating another record increase in foreclosures is probably taking place this quarter. And that means still more foreclosed houses will be coming on the market at fire-sale prices.

Nor does stirring 500,000 plus jobs being lost each month into the mix raise my confidence that either home sales or foreclosure rates are going to reverse anytime soon. I won’t mention the ripple effect of Chrysler and GM going bankrupt even temporarily.

That leaves me struggling again to believe what economists are handing out as their latest projection for the economy - this time an early end to the recession.

Sy Harding publishes the financial website www.StreetSmartReport.com and a free daily market blog at www.SyHardingblog.com.