An economic and political debacle in the making

I haven’t posted anything on the economy in awhile because I know people get tired of hearing gloom and doom. This week’s housing report was so awful, however, that I feel a responsibility (ahem) to comment. Sales of both new and existing houses fell off a cliff in July. The numbers were beyond bad. Most MSM reports said the fall was unexpectedly large but the bloggers I read who actually look at real numbers saw this coming. This is yet another example of the mass media’s cooperation with the political and economic fantasy game being played in Washington these days.

The most likely cause of this drop-off happening now was the end of the first-time homebuyers’ tax credit in the spring. While costing the Treasury more billions it doesn’t have, the credit did nothing but pull housing demand forward. In other words, people who would have bought a house anyway did so earlier because of the tax credit. It actually generated little if any genuinely new sales. So this summer’s slump is the compensation for the artificial sales’ bump earlier in the year.

Yet the July home sales drop seems even too big for this explanation. The housing market is nearly collapsing. There is now more than a 12-month inventory of existing homes—nearly unprecedented. In the new McMansion market of homes over $750,000—once homebuilders’ gravy—there were too few sales nationwide in both June and July to statistically register.

What’s going on? Several things: people can’t sell their own homes and so are not buying new ones. People are underwater on their mortgage and can’t afford to move. People can’t get mortgages for new homes. Buyers realize that home prices are almost certain to start falling again, so why buy now? And, of course, tens of millions of people are unemployed, under-employed, or are otherwise economically distressed.

Typical predictions now are that house prices will fall another 10-15% in the coming year—and some are projecting declines of as high as 25%, at least in some areas. On multiple fronts this could be economically disastrous. It could push more people into foreclosure, it certainly means further shrinkage in the building industry, and it will put further stress on banks. This latter area is certainly one to watch. We have been assured that banks have turned the corner thanks to TARP and other government aids and bailouts but that is actually only true assuming the economy doesn’t get worse. Most banks are still heavily exposed to home mortgages and further deterioration in housing could threaten their stability yet again.

All this is leading to another area of deterioration: confidence in the Obama administration. Some months ago I read a blogger’s fear that Obama could become the Hoover of the Great Recession. That possibility seems to be growing steadily (and remember that Hoover was considered a very progressive politician when elected). The scale of this disaster for workers and their families just does not seem to be registering in the White House.

Example: the HAMP program was officially designed to assist distressed mortgage holders to renegotiate their loans to something affordable. The negotiating process was lengthy but people were able to stay in their homes and avoid foreclosure during this time. The program is nearing an end and it is now obvious relatively few of these loan modifications are actually occurring because people’s financial states are just too bad to make the numbers work. In conversations last week with economic journalists and bloggers, Treasury officials acknowledged that this result was actually what they expected. The real purpose of the program they now say was to prevent a flood of foreclosures at once which would drive down home prices and endanger the banks. In other words, HAMP’s real purpose was to spread the foreclosures out over a longer period, thus saving the banks but not the homeowners.

Again and again, administration programs have either been inadequate, poorly directed, or designed primarily to buy time for large tottering industries like banking and autos. The 2009 stimulus is coming to an end. It kept some people working but has done little to create long-term economic growth. I, for instance, have a re-paved street in front of my house thanks to the stimulus program. It’s nice but wasn’t really necessary. (There are worse streets nearby but in a ward whose alderman wasn’t as quick to grab the money as mine was.) And while it provided a few people with jobs at the time it is doing nothing right now in that regard.

In short, the economy is not growing. The stimulus stopped the free-fall but hasn’t reignited the country’s economic engines. Now it appears that the economy is again turning negative. People need to be put back to work. There is nothing on the horizon to indicate that will happen on its own, or as a result of anything the government is doing or even has proposed doing. In all likelihood unemployment will start to go up again soon, thus beginning a downward spiral.

Come November, the recession could well be back at full throttle. At that point, the finer points of political ideology will matter little to most people and a “throw the bums out” mentality will take hold. Democrats should then expect a shellacking. As President Clinton famously said, “It’s the economy, stupid” and that’s no less true today.


Note: The charts above are from Calculated Risk, perhaps the best site today for unvarnished economic information, especially regarding housing. I can't praise it enough. For another, more detailed, perspective on these recent housing reports and their implications, see today's post at The Automatic Earth. The first two parts are lengthy but especially good.

And an update: Paul Krugman's column in Thursday's New York Times also addresses the topic. One quote: "Why are people who know better sugar-coating economic reality? The answer, I’m sorry to say, is that it’s all about evading responsibility." If you acknowledge there's a problem then you either have to do something about it or admit you don't know what to do.