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8 | Letter from America
A Look at the Housing Market Large purchases such as major home seasonal factors. Even the auto sector
For a snapshot of the American housing improvements, appliances, and even furniture recorded mild improvement.
market, we will look first to the Case-Shiller have an outsized effect on the economy One month does not make a trend, of
20-City Composite Index (Figure 1), co- because all typically involve credit. Buying a course. But it does give us hope that the worst
founded by Yale professor Robert Shiller. As new sofa today on credit instantly “creates,” is behind us and that at the very least the rate
we can see in Dr. Shiller’s index, home prices say, $1,000 in revenue for a furniture retailer, of decline has slowed. Other economic
in the 20 largest metro areas more than which then circulates throughout the indicators also point in this direction. At time
doubled between 2000 and 2006—even as the economy multiple times via the money of writing, weekly initial jobless claims had
country struggled with the aftermath of the multiplier effect. The end economic impact declined to “only” 601,000—still quite high,
technology bust of the early 2000s. Home from this original purchase will be several but lower than the 674,000 recorded in
prices massively outpaced family incomes times larger than the purchase itself. March. New durable goods orders have also
during this period—the result of low What we have today is the exact opposite. shown mild improvement, increasing in two
mortgage rates and exceptionally lax lending Credit is not being created by the private of the past three months. So, to repeat,
terms that artificially inflated housing sector; instead it is being destroyed (i.e. old economic indicators are still quite bad, but
demand beyond all reason. loans are being repaid faster than new loans they have stopped getting worse, and in some
are being issued). This is why, despite the cases they have become mildly better.
Figure 1: U.S. Home Prices Federal Reserve’s unprecedented expansion of
the monetary base, inflation has thus far not Figure 3: Housing Starts
US Home Prices
been an issue. Credit is being destroyed in the
private sector faster than it can be created by Housing Starts
Case-Shiller 20-City Composite
the monetary authorities.
Seasonally Adjusted,
Figure 2: Retail Sales
In Thousands
Retail Sales
Percent Change from Previous Year
Five-Month Total
Source: US Census Bureau
Source: Standard & Poors
The index has declined from over 220 at the Finally, we would like to return to the
peak to just over 140 at time of writing—a housing market for some closing thoughts.
decline of nearly 40%. If past bubbles and Figure 3 shows housing starts, a very
busts are any indication, prices should important gauge of economic activity. The
continue to fall to pre-boom levels. A fall to
Source: US Census Bureau
decline in this indicator is nothing short of
the 2000 index level of 100 would mean a amazing. Housing starts have fallen by nearly
decline of 28% from current levels and a total Consider Figure 2, Retail Sales. This chart 80%—far below the levels of the last
decline of 54% peak-to-trough. This is bad shows the percentage change in retail sales for significant housing recession in 1991. This
news for American homeowners and lenders the first five months of 2009 compared to the decline is all the more remarkable given that
alike, and it represents a significant drag on first five months of 2008. What we see is the population of the country has expanded
growth for years into the future. absolute carnage. Total retail sales are down by more than 20% during the period. For all
Americans—particularly those in the bubble 10% from 2008—and it should be intents and purposes, construction in the
states of California, Florida, Arizona, and remembered that 2008’s numbers were United States has ground to a halt. It seems
Nevada—have seen their net worths already depressed themselves! Auto sales are ridiculous to say this given the number of
decimated. We will resist the temptation down by an almost unbelievable 23%. “for sale” signs scattered across the country,
of economists everywhere to precisely General merchandise sales were unchanged. but we may see a housing shortage,
quantify what the effect on the U.S. The only areas to see positive growth were particularly in lower-cost “starter” homes,
economy will be, but we will attempt to pharmacies, restaurants and bars— within the next few years.
explain it in relative terms. Homeowners with establishments where customers use cash, not For now, we would give the U.S. economy a
negative equity are far more likely to resemble installment financing. mark of “C+”; not good but still passing. On
renters in their spending patterns. Why would So, the consumer sector continues to be in a positive note, when things finally do start to
you invest time and money improving a dire straits. We do see some signs of hope, improve, the economy could build up
property that you do not technically own? however. Though year-over-year numbers significant momentum very quickly. A
Why buy expensive new furniture or a remain miserable, there is slight improvement housing shortage—and the construction
swimming pool for a home that is declining month-over-month. The Census Bureau boom it would generate—could be the
in value? And that the bank might seize at any reports that from April to May, retail sales did needed impetus for a strong, durable
moment? improve by a modest 0.5%, adjusted for recovery.
June 2009 Investment International www.investmentinternational.com
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