Monday, May 5, 2008

(Off The) Cliff Notes

We all know that new house sales have dropped off the cliff. The most common picture of the bubble's end is the chart below: the seasonally adjusted annualized rate of sales per month (click to enlarge). Looking at this chart alone we could be tempted to conclude we are close to a bottom and may soon see a rebound. Is this likely?

Data: Census Bureau

Dramatic as the above picture may be, it does not tell the whole story. The housing boom started in 1991 and lasted for an unprecedented 15 years, during which more houses were built and sold in the US than any previous cycle. Therefore, we need to include a longer view in our picture. Looking at the blue SAAR line above we observe that housing booms before 1991 lasted ~3 years. The next chart, then, includes a 3-year rolling total, i.e. how many new houses where actually sold in any three year period (red line).

Data: Census Bureau

We see that by this measurement the housing market is still far above historical lows. If 3-year total sales are to revert to the historical 1.5 million low, annual sales must stay at 500.000 per year for three years, or dip well below that before rebounding. The 15 year boom apparently created more housing supply than demand for shelter could realistically absorb, eventually leading to a speculative bubble. It will take a significant time to work off the excess physical supply of homes. How long will the downturn last?

For additional insight, let's look at home vacancy data: Homeowner vacancies are currently at an all-time high of 2.9% and of those vacant homes, a record 2.28 million units are for sale only, up from 1.39 million in 2005 (see chart below). That's another four years worth of supply at the current pace of sales, up sharply from one year's worth in 2005.

Data: Census Bureau

This additional supply of vacant homes for sale is now acting as a lead weight pulling down new home sales further. If annual sales stabilize at current levels, then housing could be in for another 6-7 years of sub-par activity before all the excess supply is absorbed.

P.S. I noticed that Michael Klare has a new book out: Rising Powers, Shrinking Planet: The New Geopolitics of Energy. I consider him one of the most thoughtful and analytic writers on the topic of resource conflict and, unlike many others, he is an acknowledged academic expert in this field. In this book he focuses on the rising tensions between the US and other global powers - China in particular - stemming from access to energy resources. There is an accompanying article in The Nation.

I constructed the following chart of total energy use (million tons of oil equivalent per year) in the US and China. The developments after 2000-02 are quite revealing: a sharply narrowing gap in the energy demanded by the two superpowers may lead to a collision course. Unless we start changing our energy regimes very soon, conflict over scarce resources cannot be ruled out.

Data: British Petroleum


  1. The number of housing units sold is related to demand. If we import anouther few million immigrants we will increase demand for housing.
    If we deport another few million immigrants (the illegal ones, for instance) we will decrease demand for housing.
    Rental housing costs are related to owned housing costs.

  2. M3ANON,
    Okie left a link about the Bakken formation on yesterday's thread at May4@6:08AM. It's a detailed geological survey with past production figures and projections.

    I left you a summary of what I thought were reasonable scientific investigations of past climate variability and the assumptions drawn from those investigations. The source was a PBS special about climate change a couple of years ago. It is on "The Real Price of Black" thread at May3@6:14PM.

    W/respect to the danger of methane eruptions there is a recent article in the Christian Science Monitor at:

  3. Can't we reduce China's oil use by going less to Walmart?

  4. If we purchased fewer Chinese made goods and produced them ourselves, our oil consumption and imports would go up. More likely we would buy them from Viet Nam or some other low cost producer; it wouldn't change the energy equation much. The best avenue for freeing up energy resources would be to buy from the most energy efficient producers and encourage efficient production methods world wide.

  5. One of these days we may even consider abandoning the concept of "shopping as a way of life".

  6. Shopping is just a side-effect. The real problem is that finance is our biggest industry. They provide credit cards to shoppers. They provide incentives to shop-owners. They even arrange for loans (from our own pension funds) to build more shopping complexes, when we do not need any.

    The day we get rid of our 'innovative' finance industry, and focus on productive work, everything else will be fixed.

  7. "One of these days we may even consider abandoning the concept of "shopping as a way of life".


    (Just kidding)

    I believe it was Freakonomics that explained why new clothes continually need to be purchased. The rich don't want to be confused for the middle class; the middle class monitor the rich closely to copy their fashions. Red queen.

    One nice thing about soggy Seattle is that the "classes" tend to look alike (i.e. it could be an eccentric Microsoftie in that Prius wearing ragged jeans, an anime t-shirt, and Trix (cereal) watch).

  8. All of this stuff is starting to confuse me. The more food and energy take a bigger slice of wages, the less people will have for housing. How can we base housing prices on historical amounts when the "wage pie" is getting sliced up differently?

    Has anyone done a study on this or has anyone seen any numbers?

  9. Dink,
    There's an interesting article about how the captians of industry set out to inspire consumerism in the 1920's to sop up excess production rather than allow a shorter work week (it's a bit long so I only read 3 or 4 clicks down the page):

    I wasn't advocating "shop till you drop", simply that necessary purchases be made from the most energy efficient producers, alot of my stuff is 20-30 years old and the wood furniture I bought in college from an old woman born in 1889 is 60-80 years old (one of the pieces was used when she bought it).

    You hit the nail on the head, we can't go back to previous lifestyles because there has been a paradigm shift. Food and energy are going to take a bigger slice of the pie leaving a lot less for housing, prices will have to come down.

    There have been plenty of articles recently about multi-generational households being formed out of necessity. Alot of these people think it will be only temporary until the storm blows over; for many of them it will be permanent.

  10. wars over scarce resources are unavoidable, as are famine and disease. These are all density dependednt factors of population.

    Jason B

  11. Oh goodness end in sight....the American economy is plunging into black hole.

    It is strange to me that some Americans keep insisting the bursting of the housing bubble is going to sink their economy. That wasn't a bubble, you americans don't know what a housing bubble is Tokyo 1988, Hong Kong 1996, Bombay 2007...your bubble is like a little blip compared with the ones we have in Asia after the plunge in your housing prices an average American home costs less than public housing in Singapore.
    Human beings can always be worked harder to pay off their mortgages - my entire blog is dedicated to work ethics and working longer without ever retiring which is what people in Singapore are expected to do to pay off their mortgages and debts. The problem Americans is you guys are not working hard enough to hold up the real estate prices in your country.

  12. ..And if you thought the Protestant Work Ethic was bad, wait till you get a load of the Singaporean model...

    But wait! Why not bring back the Middle Ages Serf model? Or "Spartacus", the Roman Slave program to eradicate sloth and laziness. There are benefits, after all: free room and board.

    There you have it, folks. The Permawork model as a way to achieve the simplest needs of humanity: food and shelter.

  13. And if you guys want it, we have it in Singapore....a govt with one of the highest reserves per capita goes around making billion$ investments in trouble banks and we have our own citizens cleaning tables until they are in their 80s.

    The Singapore govt entities that have been investing in troubled banks with taz payers money do not even have to publish an annual report or accounts that can be appraise by the citizens.

    Your banks will survive this subprime crisis because my govt will keep injecting money into western banks and help to recapitalise your banks with tax payers money. The money is there because Singaporeans are told to work until they drop dead. So you should be thankful for our work ethics.

    We have no minimum wage, no unemployment benefits, zero safety net and the Singapore govt injected more money into those banks than anyone other than the federal reserve.

    You Americans have it easy, life is good, your cars cost less than one-third what it cost in Singapore, our public housing cost more than your average houses, our leaders are the highest paid in the world....please stop complaining, you guys will survive this housing slump.

  14. Well Hel,
    Thom Hartmann has been predicting for seven years or more (that's when I first read anything by him) that the right wing is bent on repealing the 20th century and re-instituting de facto serfdom and manor lords which they consider to be the natural way of the world.

  15. One more thing, without sounding too culturally biased but attitudes toward money are very different in East Asia; it's not uncommon to find the poor forced to sell their children into indentured servitude for a number of years to pay off their debts.

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