Don’t be fooled by the surge in existing home sales in Ocotober.
The number was far larger than expected. But the only people helped out by the sales of existing homes at low prices are real estate agents and banks collecting fees on new mortgages.
For the rest of us, the surge in existing home sales is basically a non-event. If anything, the 10.1% surge might bad news for the broader economy.
The problem goes far beyond the usual griping you will hear today. Yes, low prices, low interest rates and the tax credit all boosted sales. But if these sales were really giving the economy a boost, that would be terrific news.
Home sales can be both an indicator of economic strength and a contributor to economic growth. That is, home sales can be both a signal that the economy is recovering and a path to recovery itself. This time around, however, the home sales numbers are neither a signal nor a contributior.
You see, the signalling from home sales is all screwed up due to the subsidies involves. And the economic boost from home sales really only arises from the sale of new homes. The sale of existing homes doesn’t give a boost to anyone.
“The only contribution from existing home sales to the economy are some commissions and fees. That is good news for real estate agents and mortgage brokers, but not for the overall economy,” Calculated Risk explains.
The only legitimately good news in today’s home sales numbers is the decline of overhanging housing inventory to seven months, which is elevated beyond the “healthy” 6 month supply but far below the horrific oversupply numbers from several months ago. Unfortunately, the oversupply of rental units is climbing, suggesting that our subsidies may just be convincing some renters to become owners. That’s not economically useful.
The key to reducing the overall inventory is new household formation (encouraging renters to become owners accomplishes nothing in reducing the overall housing inventory). And the key to new household formation is jobs. And usually the best leading indicator for jobs is residential investment. Somewhat of a circular trap.
And that suggests the recovery will be sluggish and unemployment will stay high for some time.
To sound an even more bearish note, there’s a real danger to great news that is actually economically irrelevant. You’ll get bulls like Jim Cramer screaming about how the economy is about to soar. Investors will take on more risk, businesses will overstock inventory. When it becomes clear the October home sales were a head fake, there will be a lot of pain.
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