Gary North

June 30, 2009

In a recent Bloomberg article, tis interesting tidbit of information appeared.

The residential real estate market improved ahead of the end of the past seven contractions, with home construction starts beginning to climb an average of seven months before gross domestic product picked up and sales gaining about four months in advance, according to data compiled by David Berson, chief economist of PMI Group, a mortgage insurer in Walnut Creek, California.

The article begins with a brief description of Riverside, California, where rows of abandoned homes remain unsold. Banks will not lend money to investors. They want only owner-occupied homes on their books. Problem: no offers from buyers. The homes are rotting.

Where is the $275 billion pledged by Obama? Nowhere to be seen.

Existing U.S. home sales in May rose 2.4 percent to an annual rate of 4.77 million, lower than forecast, and the median price was down 16.8 percent from the same month in 2008, according to the Chicago-based National Realtors Association.

There's little chance the turnover will increase enough this year to end the housing recession, said Andres Carbacho-Burgos, an economist with Moody's Economy.com in West Chester, Pennsylvania.

Then what hope is there that we are close to the bottom of this recession? Is it different this time? Will the recovery be led by some other sector? Which sector? How? How soon?

Housing starts are at their lowest level since 1945, even with a 17 percent increase in May that pushed the annual rate to 532,000 from a 454,000 pace the prior month. So many properties are for sale -- 3.8 million as of last month -- that it would take 9.6 months to unload them at the current sales pace, according to the Realtors group. The inventory averaged 4.5 months in the six years from 2000 to 2005.

People are afraid of losing their jobs. They are not in a buying mood.

Personal bankruptcies are up by 37%, May to May.

Foreclosures may hit 2.5 million this year, said the full-time economist for the National Association of Realtors, Lawrence Yun. The NAR is usually upbeat. This figure is not upbeat.

Then comes this news. The U.S. has 93 million houses, condos, and co-ops. Over 20 million of these are now underwater: worth less than the mortgages.

Half of the banks tightened lending requirements in the first quarter. They are afraid. So, houses remain empty. They depreciate.

When they fall to such busted values that investors can afford to pay cash, these houses will move. But the banks will then have to write down the loans. The illusion of solvent assets will die. This will cause a wave of bankruptcies of small banks.

Green shoots? What is Bernanke smoking?