Housing is the engine of the current US expansion. Merrill Lynch's analysis of the current expansion credits housing with 50% of total GDP growth. According to Paul Krugman, housing related employment is responsible for 40% of this expansion's job creation. In short, housing is currently the single more important economic area in the US economy. Recent housing related indicators suggest housing is slowing which could in turn slow macro-level GDP growth in 2006.
Home resales in the United States fell 5.7 percent in December to the lowest level since March 2004 as the market cooled on the back of slowing Midwest economies and the loss of investors, a trade group said on Wednesday.
But for the year, 7.072 million existing homes were sold, making 2005 the fifth record year in a row, the National Association of Realtors said.
December's drop in existing home sales signaled further cooling in the U.S. housing market after five years of gains that shattered construction and sales records and sent prices up more than 55 percent nationwide
This is the third consecutive drop in new home sales. In addition, the number of months of available housing related inventory is 5.1 (the highest in one year) and the total inventory available for sale is 26.3% higher than 1 year ago. The South was only up 1.9% and is still 11% below September levels, indicating a post-Katrina purchase increase is not as strong as originally thought.
The inventory situation is particularly troubling. First, the yearly percentage increase of homes available for sale indicates sellers are trying to lock-in gains but not getting them. Secondly, if the sales trend continues downward, the months of supply available for sale will continue to increase, creating the increased possibility of panic selling.
The most recent housing starts numbers dropped 8.9%. Some of this is seasonal - the Midwest saw a 23% drop and the Northeast saw a 14% drop; no one wants to build a house in winter. Some of this is obviously weather related. However, the West saw a 23% drop to its lowest level in a year (However, the West has seen unusually large numbers of homes started in the previous 4 months, indicating some of this drop-off is from an exaggerated level). The only region that increased was the South, which increased 5%, which still seems low given the hope of a post-Katrina building boom.
There are some other signs of a housing slowdown. Equity extraction is at its lowest level since 2000, indicating there is only so much money consumers have takeout of their homes (or consumers have finally hit a wall of debt). Total consumer debt now equals 87% of US GDP, indicating consumers are already very levered. Consumer credit dropped the last two months. Housing stock insiders (corporate directors and officers) started dumping shares last summer and housing stocks have lost about ¼ of their value over the last 6 months.
There is no way to forecast what will happen, but all possibilities are on the table. Only time will tell exactly what happens.
