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Aug. 23rd, 2009
just briefly
Aug. 23rd, 2009 10:05 pmI've been also taking a bit of vacation from economics, but I did want to drop in one brief note on housing.
A lot of news sources were talking up the upsurge in housing sales, most particularly in the worst-hit areas of the housing crash. Most of them did not note that this is entirely normal; housing sales always surge in summer. Summer is selling season. That hasn't changed. Some of them, at least, were mentioning that much of this jump was due to a surge in sales of foreclosed homes, and that other sales remained quite low. However, they were making no distinction between foreclosure sales and general sales, which is misleading.
A foreclosure sale makes no one any money. It may limit the loss a bank has already suffered, but the profit is long gone - the money that interest was supposed to generate in return for the bank. That's not coming back in any of these sales. And they aren't just missing profits: they're taking capital losses as well, with the sharp and continuing drop in home prices, particularly in the area where these bankruptcy sales are picking up so strongly. All those bad CDOs and MBSes and all that? They were supposed to generate profit against the interest payments - the bank profit - not the principle. All that's gone, and none of this is helping any of that come back.
Further, foreclosure sales don't really spur additional economic activity in the way that regular sales often do. There's no house-seller buying up into another home, or down into a smaller home; there's no chain of resulting sell-and-purchases that drives up demand and which then drives up production, which is where value actually gets created. And foreclosure sales are still far behind the rate of additional houses falling into foreclosure, so we aren't even beginning to address the inventory issue. Finally, there's a negative-feedback loop effect here, where bankruptcy sales drop house average prices in an area, which in turn causes downward pressure on prices of all homes, and so on. It's a negative feedback loop, where these sales cause further downward pressure on prices of all homes.
Don't get me wrong; these sales need to happen and they're part of the cleaning-out process. But they're not a sign of a turnaround in housing. It'd be nice if they were, but they just aren't. Only once these sales numbers start to fall will you be able to talk about a bottoming of house values. We're still a fair ways away from that.
A lot of news sources were talking up the upsurge in housing sales, most particularly in the worst-hit areas of the housing crash. Most of them did not note that this is entirely normal; housing sales always surge in summer. Summer is selling season. That hasn't changed. Some of them, at least, were mentioning that much of this jump was due to a surge in sales of foreclosed homes, and that other sales remained quite low. However, they were making no distinction between foreclosure sales and general sales, which is misleading.
A foreclosure sale makes no one any money. It may limit the loss a bank has already suffered, but the profit is long gone - the money that interest was supposed to generate in return for the bank. That's not coming back in any of these sales. And they aren't just missing profits: they're taking capital losses as well, with the sharp and continuing drop in home prices, particularly in the area where these bankruptcy sales are picking up so strongly. All those bad CDOs and MBSes and all that? They were supposed to generate profit against the interest payments - the bank profit - not the principle. All that's gone, and none of this is helping any of that come back.
Further, foreclosure sales don't really spur additional economic activity in the way that regular sales often do. There's no house-seller buying up into another home, or down into a smaller home; there's no chain of resulting sell-and-purchases that drives up demand and which then drives up production, which is where value actually gets created. And foreclosure sales are still far behind the rate of additional houses falling into foreclosure, so we aren't even beginning to address the inventory issue. Finally, there's a negative-feedback loop effect here, where bankruptcy sales drop house average prices in an area, which in turn causes downward pressure on prices of all homes, and so on. It's a negative feedback loop, where these sales cause further downward pressure on prices of all homes.
Don't get me wrong; these sales need to happen and they're part of the cleaning-out process. But they're not a sign of a turnaround in housing. It'd be nice if they were, but they just aren't. Only once these sales numbers start to fall will you be able to talk about a bottoming of house values. We're still a fair ways away from that.
