Economists' Commentary: The Forecast and Pending Home Sales
February 2, 2010
By Lawrence Yun, Chief Economist
December pending home sales index rose ever so modestly over the month, after having plunged in November. Pending sales - which are contract signings and not closings - had fallen hard in November in light of many consumers assuming that the tax credit would not be available after November 30th and the near impossibility of closing the deal within a month. November to December activity was little changed but both months' activity remained comfortably above levels from this time last year, suggesting that the housing market has built up sufficient momentum on its own. As the tax credit urgency reappears in late spring and in June (the new tax credit deadline), there is likely to be a second surge in home sales activity. After that, sales will surely tumble once more in the immediately following months. The key gauge to monitor at that time is whether or not sales remain above levels from last year. If so, we can be assured that the housing market is on a sustainable recovery path even without any additional stimulus.
The swings in pending home sales had that near direct swing relationship with actual closing figures, with a one-month lag time. December existing home sale closings were most disappointing given the huge decline in pending in November. The closing sales tumbled, in fact, by the largest month-to-month percentage change in over 40 years - so said the media. As with pending data, the latest December figure for closing when compared to the exact month one year prior was higher by 15 percent. Interestingly, the December sales on a seasonally adjusted annualized basis (the accounting method applied for most economic indicators like GDP and job gains) were the fourth highest monthly tally in two years; only the three prior months of tax credit-induced sales were larger. Perhaps, the December sales were not that much of a disaster from this perspective. The largest sales decline or the fourth highest sales levels in two years? Which of the two ways do you think the media played the story to attract readership?
Irrespective of this, consumers are wising up. They are seeing consistent declines in inventory and prices beginning to stabilize in many parts of the country. NAR recorded its first 12-month price gain in over 2 years in December. Other price data such as from Case-Shiller and the government's Federal Housing Finance Agency have also shown price stability in recent months. With this trend, the consumer 'fear factor 'regarding home buying will essentially disappear in 2010 and be no longer a drag to the housing market.
However, anxieties are building from another angle: the job market. The unemployment rate could top 10.5 percent sometime in spring before steadily heading lower. Even those with jobs may be afraid to make a large purchase given the high unemployment rate and the greater uncertainty regarding their own jobs. In the U.S., with a growing population, there needs to be about 80,000 net new job creations on average each month just to keep the unemployment rate from rising. Much higher job gains are needed in order to drive down the unemployment rate for good. Sometime in the first half, possibly even as early as April, there will be net job additions for the country. But the unemployment rate could easily continue to inch higher because job additions are less than 80,000 per month. Still, from the real estate market perspective, it is job creation that will be the determinant of demand and not the unemployment rate. In the second half of the year, a total of 700,000 net new jobs could be added to the economy even though the unemployment rate stays close to double-digit rate right up to the November mid-term election date. There will, therefore, be electoral consequences.
Short-term corrective actions to stimulate the economy are well justified provided they are rightly focused. But another year of record high budget deficit is disturbing. The Obama Administration now expects an even higher budget deficit in 2010 compared to 2009; $1.6 trillion versus $1.4 trillion, respectively. Prior to these budget deficit blowouts, the largest ever recorded deficit was not even $500 billion. Put it another way, if every dollar and cents for the Defense Department is reduced to zero dollars - as in no more soldiers and no missiles - the U.S. budget deficit in 2009 and 2010 will be still be the highest ever in the U.S. history. Clearly, the U.S. budget deficit is structural outside of the defense spending.
To be fair, the deficit should be measured in relation to the U.S. overall economic pie. By this measure, the '09 and '10 deficits are one of the highest but not the highest. The highest deficit-to-GDP occurred during the Second World War. However, in the immediate years after the war, the deficit was brought down close to zero very quickly because of significant defense spending reduction in the post-war period. During those years, government spending was primarily defense spending, so a reduction in defense automatically meant a sharp reduction in the overall government spending. That is not the case today.
The only good news on the deficit front is that it is expected to slide from 2011 until about 2017. After that, look out. With about 10,000 baby boomers expected to retire every single day the social security and medicare benefit payment obligations will soar while the labor force shrinks in size. The deficit at that time will completely become out of whack unlike anything seen before and for a sustained period. Taxes will have to be raised and/or government spending reduced drastically. Otherwise, there could be high-inflation or a debt payment default leading to massive disruption and downward spiral in U.S. standard of living. The debate will be over these two unpleasant choices - unless a third miraculous solution gets realized. That third solution is economic growth. The future deficit nightmare scenarios are often based on average GDP growth of 2.5 percent to 2.8 percent per annum. If somehow, the GDP grows by 4 percent or 4.5 percent on a sustained basis, then there may not be a need for a tax increase or government spending cuts. Is higher GDP growth a possibility or simply a hope and hype? The Chinese economy, for example (given a low base point to start from), has been growing at about 10 percent per year for over the past two decades.
Higher GDP growth can only come from raising labor productivity and not having a wrong economic system. One quick solution to raising productivity would be to clone multiple Albert Einsteins and Bill Gates. More realistically or at least worth pursuing is for students to work harder. Perhaps it is time to rethink 'feel-good' education where everyone receives blue ribbons and no one takes courses in advanced math and science. Huge bonus payments in the financial industry could also drain the nation's talent away from scientific and medical fields where productivity gains make differences. Innovative educational programs should be tried and tried again. Throwing more money at the status quo education system will be one of the least innovative methods. Evidence abounds in the U.S. of the lack of relationship between improved learning to increased funding. In Britain, educational learning fell in relation to students in other countries after its education budget doubled.
The economic system also matters a great deal in raising productivity. In light of the Haiti earthquakes and the need for reconstruction, we should be mindful that people of North Korea today are even poorer than in Haiti and live in constant fear in their 'socialist paradise'. The South Korean economy by contrast is now ranked in the top ten in the world. During the Korean War, many U.S. and U.N. soldiers (with heavy sacrifices from Britain and Turkey) did not know what they were doing in such a poor country nor about what they were fighting for. Perhaps, now with such distinct different economic outcomes between North and South Korea, the veterans and their family members have a better understanding that their efforts made profound differences in the lives of millions of Korean people. In a similar vein, millions of ordinary people have contributed to helping Haiti get back on its feet. Perhaps Haiti can also adopt the best of economic ideas and soon show the world that it too can make it into the top-tier economies in two or three generations.
To read the Forecast file, click here >
This is one in a series of commentaries by the Research staff of the National Association of REALTORS®. Read more commentaries >
Comments? Questions? E-mail NAR Research.
NAR members, learn how you can add this commentary to your Web site, blog, or newsletter. Read more >
