There's No Reason To Panic

Perhaps it is passé to say our economic world changed permanently in 2007-2008, but if that is so, why do so many Americans, especially near the beginning of what promises to be another dreary year, continue to believe otherwise?

Home prices in 20 U.S. cities rose in the 12 months to November by the most in more than six years, showing the housing market will play a more central role in the U.S. economic expansion this year.

The S&P/Case-Shiller index of property values increased 5.5 percent from November 2011, the biggest year-over-year gain since August 2006, according to data released in New York today. Confidence sank more than forecast in January as consumers were stung by a drop in take-home pay, another report showed.

Mortgage rates near a record low will probably spur a third consecutive advance in home sales this year, which will keep property values rising.

There is no dearth of stories like this one from Bloomberg. Cheerleading is America's leading industry.

These cheerleaders seek to assure us that there's no reason to panic, in so far as the Commerce Department announced today that GDP fell 0.1% in 2012 Q4 (at an annualized rate).

Dr. Vincent Malanga, president of LaSalle Economics, talks with Jim Chesko about data showing that U.S. economic momentum screeched to a halt in the final months of 2012 as businesses pared back inventories and government spending fell sharply. The Commerce Department said this morning that the nation’s gross domestic product shrank for the first time in three-and-a-half years during the fourth quarter, declining at a 0.1% annual rate...

Malanga — "And I don't think the economy actually declined in the 4th quarter. It wasn't as weak in the 4th quarter as these numbers suggest, nor was it as strong in the 3rd quarter as the prior numbers suggested. I'd say the truth lies in-between at about 1 and a half percent..."

If you don't like the numbers the government gives you, make up some new ones you're more comfortable with. In line with Vincent's reassuring thoughts on the steady mediocrity of the current situation, the housing market is not yet playing "a central role in the U.S. economic expansion" as Bloomberg promised it would.

The Case-Shiller Index as of November, 2012. Both the 20-city and 10-city composites are now at their 2003 levels. Chart from Tim Iacono, who wonders aloud what all the fuss is about.

Interestingly, Yale economist Robert Shiller, the co-creator of the home price index, doesn't believe there is any identifiable trend in the housing market. Among economists, we can respect Shiller because he is not afraid to use the word "bubble" in the pages of the New York Times.

WE’RE beginning to hear noises that we’ve reached a major turning point in the housing market — and that, with interest rates so low, this is a rare opportunity to buy. But are such observations on target?

It would be comforting if they were. Yet the unfortunate truth is that the tea leaves don’t clearly suggest any particular path for prices, either up or down...

History doesn’t suggest that another big bubble will come so fast. In fact, before the most recent one, the United States had had only one major national home price boom in the last century, when real prices rose a total of 68 percent from 1942 to 1953.

After the traumatic collapse of the last price bubble, Americans seem less sanguine about owning versus renting. According to the Census Bureau, the homeownership rate has been falling, from 69.0 percent in the third quarter of 2006 to 65.5 percent in the third quarter last year.

Some analysts disagree with Shiller, believing another housing bubble may be in the works, but Shiller is right to say that history (and many other factors) suggest that no bubble is possible now.

I wrote about the low interest rates which are meant to blow another bubble in the housing market—whoops! I meant "fuel a housing recovery"—in The Fed Engineers A Phony Recovery, which you might check out if you are so inclined.

Thus there is no reason to panic, nor is there any reason to believe that housing will fuel a genuine economic recovery in 2013.  On the contrary, we will likely see more of the same "new normal" this year that we have seen every year since the world changed. We are stuck in the doldrums, in some weird kind of Limbo, where stagnation in the short term continues against a backdrop of longer-term decline.

If you yearn for some exciting events which would cause the economy to break out of this overbearing pattern of ongoing stagnation and historical decline, I suggest you be careful what you wish for.

Bonus Video — U.S. Economy = Dead Parrot

 

Comments

[Oliver]

Dave - It's apt you mention Limbo. Those talking up the "recovery" (no doubt so they can make another buck off the gullible) are performing a variant of the Limbo Dance. There's no knowing how low they'll stoop.

https://www.youtube.com/watch?v=F3sxc5-3CSU