The End Of Suburbia — Really!

As Bill Bonner would say, 98% of everything you hear (about housing, retail spending, etc.) is merely noise. Only the underlying trends are important, if you can identify them. I believe we can spot one: It's The End of Suburbia. I'll return to this hypothesis at the end of this post.

The housing market is still unraveling, as foreclosures and delinquencies on underwater properties continue to rise. This a direct consequence of the collapse of the Housing Bubble, yet it's been nearly 4 years since home prices first started to fall (graph below). This is why I think the Empire deteriorates gradually—it takes time for these disasters to become apparent. I don't believe there's a sudden panic-in-the-streets collapse as Gerald Celente does.

Source. I inserted a trend line (light blue) in the median home price quadrant (upper left). I believe home prices will fall another 5-10% before reverting to the mean growth trend. This reversion will take years.

In my view, it will take many more years—certainly not before 2012—for the housing market to stabilize. In the last few quarters, ever more desperate government support programs have slowed the crash in house prices. Nonetheless, I believe we can expect another 5-10% decrease in those prices. After that, once foreclosures, short sales, walk-aways, etc. return to normal levels as all the underwater properties get settled one way or another, it will take years to work off the excess inventory (homes for sale, upper right quadrant above). As I've written before, it will likely take 7-8 years for us to get back to "full" employment (a 5% jobless rate). The longer a large percentage of Americans remain underemployed, the harder it will be to work off the inventory of unsold homes. This is one big sorry mess, folks.

And now add in the fact that the depressed, reeling housing market itself will hamper America's economic recovery. Calculated Risk's graph below illustrates how new housing jump starts economic recoveries.

Note the surge in new housing starts at the end of each recession, but not this one!

I think it's fair to say that an explosion of new housing starts won't be leading a recovery this time around, nor do I believe that an economic recovery is possible without one. There's been some denial on this point lately. Calculated Risk (CR) quotes Minneapolis Fed President Narayana Kocherlakota's Economic Recovery and Balance Sheet Normalization—

Let me start my outlook with the most troubling information first. Housing starts and sales remain at near historically low levels. These data are disturbing to many observers. And that’s understandable. After many past recessions, residential investment has played a significant role in the subsequent recovery. Arguing by analogy, some are concerned that we cannot have a sustainable economic recovery unless housing starts pick up dramatically from their current low levels...

I have to say that I’m somewhat skeptical of this thinking. Yes, the housing sector is important, but residential investment makes up just 2.8 percent of the country’s gross domestic product...

To which CR replies—

This is an error in analysis. Back in 2005, several analysts argued I was wrong that a housing bust would eventually take the economy into recession—they said residential investment was only 6% of the U.S. economy! They were wrong because they didn't consider all the add on effects—and the impact of financial distress. Now residential investment is only 2.5 percent of GDP, and Kocherlakota is making the inverse faulty argument. During previous recoveries, housing played a critical role in job creation and consumer spending. It isn't the size of the sector, but the contribution during the recovery that matters—and housing is usually the largest contributor to economic growth early in a recovery.

Now things get really interesting. From Kocherlakota again—

Housing starts are ... strongly affected by the general health of the economy (job growth or loss) and the stock of housing relative to demand. As I see it, the problems in the housing sector right now are largely driven by this second factor. For a number of reasons, the nation has built a lot more houses than it now needs or wants. As a result, my own prediction is that housing starts are going to remain low—possibly for several years.

[My note: I can't include the entire article here, so visit CR's original article for more discussion]

What an astonishing statement: For a number of reasons, the nation has built a lot more houses than it needs or wants. No kidding! Kocherlakota is referring obliquely to what I call The Suburban Project. One could argue that our suicidal suburban (and in recent years, exurban) housing expansion has increasingly dominated the American economy since World War II, but especially since the early 1990s after the dip in the 1980s (graph below).

Source: The Homeownership Bubble—An Economic Crisis Explained

In future posts, I will expand on how home ownership has been more and more central to America's phony economy. The United States became a Banana Republic in which buying & selling houses—real estate & financial speculation, with the accompanying interest, derivatives & fees—replaced productive, wealth-creating economic activity accompanied by strong wage growth. We don't make many cars anymore, but there's no shortage of real estate agents.

So why is this the End of Suburbia? Conceptually the answer is easy, although I think the details will be messy going forward. It will be many years, perhaps in the 2014-2016 period, before The Suburban Project would be able to pick up where it left off, as I hope I have established to your (preliminary) satisfaction in this short post.

But in 5, 7 or 10 years, the average cost of liquid fuels will be much, much higher than it is now. This is where things get messy because in the future, I expect there to be a series of oil price shocks followed by periods of recession and low demand, just as we saw in 2007-2009. Extraordinarily high oil prices down the road, even if they are transitory, will destroy any attempt to resume or sustain The Suburban Project. 

And that's it. I believe we've reached The End Of Suburbia—Really!

Comments

[John Hemington]

Nailed it!

[rjs]

yep:

Washington considers a decline of world oil production as of 2011 -
The U.S. Department of Energy admits that “a chance exists that we may experience a decline” of world liquid fuels production between 2011 and 2015 “if the investment is not there”, according to an exclusive interview with Glen Sweetnam, main official expert on oil market in the Obama administration.

http://petrole.blog.lemonde.fr/2010/03/25/washington-considers-a-decline-of-world-oil-production-as-of-2011/

http://www.eia.doe.gov/conference/2009/session3/Sweetnam.pdf (see page 8)

and

The Pentagon also expects an imminent oil shock - A report from the American Joint Forces Command published March 15 predicts that in 2015, the world capacity for petroleum prouction could be 10 million barrels per day less than the demand. The report of the American Department of Defense (DoD), titled Joint Operating Environemnt 2010 indicates (page 29):"By 2012, surplus oil production capacity could entirely disappear, and as early as 2015. the shortfall in output could reach nearly 10 MBD." 10 million barrels per day (MBD), that represents the production of Saudi Arabia, the world's leading petroleum producer. Such a shortfall, if it should come, would be more than 10 percent of the world demand for crude, which is today 86.5 MBD, and ought to reach 90 MBD in 2015.

joint operating environment pdf: http://www.fas.org/man/eprint/joe2010.pdf

[Sue]

Although I think you are right, HAVE the government programs been "ever more desperate"? It seems to me that the government effort is trailing off.

Also, the US population finally dipped below replacement levels in 2008, a very good development sustainability-wise, but one that will upset many calculations. How does that figure in?

Suburbia is still a-building where I live. New developments coming on line, and new requests to the planning board for subdivisions. Not at the same pace, certainly.

Decline can be slow AND fast, at least linearly. That is, it can be slow for a while and then fast, very fast.