What Real Residential Investment's Cliff-SPLAT! indicates about the Recession

We all know by now that the economy is cliff-diving. Many bloggers can ably describe the dive in progress. One of the distinguishing things I have been trying to do over the last year is to look ahead to determine, "Where is the bottom of the cliff, and When do we get there?" Unlike most recessions, which might be described as bungee-jumps, where you get to the bottom and rebound quickly, this recession heralds a secular change, as housing and financial bubbles burst. In those circumstances, typically there is a crash or cliff-diving stage (also described by Russ Winter as the "guillotine" phase) followed by a slower, more sideways, grinding stage (described by Russ Winter as the "sandpaper" stage). Or, as I've described it many times, a Slow Motion Bust.

A more visual depiction of such crashes is to liken them to going over the American falls. First there is the free-fall, then the bouncing to the bottom of the rubble. For example, in my last blog, I noted how new home sales almost had to be nearing the bottom of the cliff. Or, visually:

Why New Home Sales' Cliff-SPLAT! is not bad news

January New Home Sales, released yesterday, were -- perversely -- good news! Despite the perfectly correct mantra that new home sales continued to cliff-dive, and that, as my friend Bonddad said not once but Twice(!) yesterday, "We're Nowhere Near a Bottom in Housing" the simple fact is that the housing market is showing ample signs of the beginning of a transition.

The Greedy B*st*ards Can't Help Themselves

A great article today
"How the Banks are Worsening the Foreclosure Crises"

The banks cannot help themselves and unfortunately Congress is listening to the banking lobby. Every "new idea" to turn around this economy seems to start out with good intentions and then the banks get involved. Despite the best efforts of some ... the greed is too great.

[..]on Apr. 18, 2007, behind closed doors in an ornate hearing room in the marble-faced Dirksen Senate Office Building. Dodd told them they needed to get out in front of the foreclosure fiasco by adjusting loan terms so borrowers would continue to make some payments, rather than stopping altogether.

Housing slump now the Worst since the Great Depression

This morning the Census Bureau reported housing starts for December 2008. The number, 550,000 units, was considerably worse than the already expected number. Which means we have passed a milestone. We are now officially in the worst housing slump since the Great Depression.

Almost exactly a year ago, I wrote a diary entitle, The worst housing slump since the Great Depression? which noted that, at that point, the housing decline was on par with the worst since World War 2, and was likely to worsen.

Here's the data I cited:
In December 2007, an annual rate of 604,000 new single family houses were started. This is a dramatic decline of (-56.5%) from the all time high of 1,389,000 annual rate of starts only 17 months ago in July 2005.

Black September and home sales

A few weeks ago I diaried that, while Housing is nowhere near bottoming, nevertheless there was substantial evidence that the decline may be shifting from the vertical, "guillotine" phase to the more bumpy "sandpaper" phase. I wrote:

In the case of the housing market crash, how would the change from "guillotine" to "sandpaper" look? In the past, Calculated Risk has reckoned that the inflection point between advancing and declining house prices was at about 7 months' supply. So I submit that first of all, we would see a decline in months' supply of houses for sale towards that mark, as sales started to outstrip new house starts and existing homes being offered for sale. In order to accomplish that, you would first need to see that new home building has declined to a level where sales exceed new starts. You would also want to see existing home sales increasing on a year-over-year basis. In other words, the volume of new home starts would transition from guillotine to sandpaper first, well before prices themselves would begin the transition.

And Guess what? All of those conditions have either started or appear to be on the cusp of starting.

Housing and Recessions, Or, This Time it Isn't Different

In Friday's diary, Housing is Nowhere near Bottom, BUT ... I cited as I have several times previously a paper on housing cycles and recessions that was presented by Prof. Edward Leamer to the Federal Reserve at its Jackson Hole conference in 2007. The paper itself is an excellent, in-depth analysis and I highly recommend your reading it in full if you have an hour or so on your hands due to inclement weather, indolence, intellectual curiosity, or if you just generally have a pathetic life.

Unfortunately, many people are dismissing Leamer because even though the data in his paper led to a spot-on conclusion, namely:

The historical record strongly suggests that in 2003 and 2004 we poured the foundation for a recession in 2007 or 2008 led by a collapse in housing we are currently experiencing....

Housing is Nowhere Near a Bottom, BUT . . .

My buddy Bonddad occasionally posts items invariably entitled, We're Nowhere near a Bottom in Housing. I agree with that, but there are signs that change is afoot.

As I have previously described, Prof. Edward Leamer has studied all of the post WW2 recessions, and has noted that society needs only so many new houses and vehicles in any given year. Expansions typically end at a point where there has been overproduction of both. The recession ends and the next expansion begins only after that excess has been sopped up by a long and/or deep enough period of underproduction. Needless to say, there was wild overbuilding of houses in the first part of this decade. In fact, the graphs which appear below suggest overbuilding began ever so slightly over 10 years ago.

Manufacturing Tuesday: Week of 12.02.08

(editor's note: I was planning on publishing this morning, but some major personal business involving a sick wiener dog to one of those emergency vets had to take precedence. )
Ladies and Gentlemen, welcome to another edition of Manufacturing Monday...er Tuesday! Originally I wanted to post this on Monday morning, but I wanted to include the latest development from the Boeing SPEEA talks. Outside of this we got news from the steel industry, unfortunately not the good kind. Sticking with steel for a moment, there's an op-ed piece I wish to highlight that I thought you should look at. We have news or alarm bells I should say about pensions. Of course we also have some Green news, some ominous, but some good.

But before we get to those, let's take a look at the Numbers!

The Numbers