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Housing industry pyramid due for some new excavation
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No pain, no gain? If we really wish to avoid history repeating itself in the housing market, then a cure for our economic behavioral disorder is only made by a close and honest scrutiny of the path that led us here.
Beacon Economics economist Dr. Christopher Thornberg takes a good look at the road we traveled in his Builder and Developer article, What’s Really Going on with the Economy?
Unlike so many politicians, telling us to spend in order to prop up the economy, Thornberg says that the current pullback in the consumer spending is a good thing for an economic rebound because Americans need to re-learn the art of saving. He reports that so far, we’re a quick study, because savings rates are already up 4%, -- about half of where it needs to be before it will again re-align with the appropriate amount of spending not financed by debt.
“When the housing pyramid finally collapsed in 2007, it did so because prices were seriously out of whack regarding household incomes and what a home might rent for on the open market," says Christopher. "The building of this pyramid was fed by the ridiculous availability of easy credit to anyone who could fog up a mirror, made possible by too much money sloshing around the world in search of an easy return. The titans of Wall Street, focused on short-term gains and enabled by ratings agencies to leverage borrowed money to ratios that were unsustainable, ignored the long-term ramifications of their financial alchemy simply because they could.
But so did the average American consumer," he adds, "who collectively bid up the total value of U.S. assets to $80 trillion dollars, yielding a national price-to-earnings ratios (asset values vs. earnings) that was 25% to 30% higher than its long-term average.
Consequently, the true sin of Wall Street isn’t that they robbed Baby Boomers of their plans for early retirement, but that they actually made them think it was possible at all. It may not make you feel better, but that extra wealth, which could total $20 trillion, was really never there in the first place.”
“The building industry,” he says, “will have to be patient. Given the size of the current bubble, it will take more time for the market to wring out its excesses." Christopher predicts, "When housing does hit bottom, rather than experiencing a nice bounce like in the past, it will simply dribble on the ground until household financnes and consumer sentiment catch up.”
The economist believes that in the long run, lower prices are the best medicine for an industry that requires affordable housing in order to operate and that for now, homebuilders should resist the urge to panic.
He ends his commentary with, “There’s a reason the Chinese character for the word ‘crisis’ translates as ‘danger plus opportunity.’”
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