Continuing the Discussion on Economic Recovery

Random Thoughts from the High Desert

Written by Sig Silber

What does the slow recovery in housing construction tell us about this so-called economic recovery?

The slow rate of recovery in housing construction is illustrated in the above graphic by Lee Adler.  I think it is the canary in the mine for the U.S. and signifies a major area of vulnerability.

There have been some recent articles on the slowdown in growth of the housing sector.

I covered some of this in my recent article.

What is clear is that we have not had a true recovery of the housing market. There has been some recovery but a significant percentage is investor activity, either speculation or taking advantage of the predicament of many people and providing rental opportunities for those who can not qualify to buy a house or are reluctant to do so.

There are demographic reasons. There are income distribution reasons. Large expensive houses are selling. Starter houses are not. This unbalanced nature of the housing recovery indicates problems of sustainability of the overall economic recovery.  I pay more attention to new construction rather than sale of existing housing and commercial real estate simply because the sale of existing structures does not have the same impact on the economy as new construction.

One of many problems relates to the ability of young people to fully participate in the economy. We have taken many actions to complicate the lives of our youth including prematurely raising minimum wages and turning our schools into propaganda factories rather than educational facilities. So we have people who are at the age when they would normally be forming households and buying houses but are instead living at home or renting.

Imagine what will happen to the housing industry if interest rates begin to increase. This would lead to another financial crisis only this time it would have a larger component of underwater rental housing and rental apartments. This could have more impact even than the prior collapse because a bank owning housing where the borrower is living in the house might prefer allowing the borrower to stay in the house and maintain it. But a rental landlord has out of pocket expenses in addition to debt service and may have few if any legal protections from foreclosure so they may be more vulnerable. On the other hand, banks may not be equipped to provide services to renters. So there is a lot of potential for such a situation to develop even more quickly than the prior crisis.

Curiously, those writing about real estate suggest that the increase in supply of new and existing housing (let alone the hidden inventory of properties foreclosed or scheduled to be foreclosed but held off the market for various reasons) and the continuing non-occupancy (vacancy) rate in commercial buildings is an indication of improving buyer or renter choice which will lead to future increases in sales and rental activity. In most industries, higher levels of inventory suggest future problems.

Government insists on destroying the economy and has been relatively successful at this. It has provided some opportunities for investment capital (often hot money escaping from legal authorities in other nations) to benefit from the suffering of others by acquiring distressed properties. But I think if you look at the employment numbers in construction, you will see that there has not been much of a recovery. Standard home affordability measures suggest that housing is very affordable right now but young people are not buying either that analysis or houses.

To me destroying a generation is very much like what took place in China but this has been done without violence. Never-the-less, I consider it to be a crime against humanity and hopefully someday those who have put this plan into action will be held accountable for their actions.

That will not happen for a while as those who have compromised this generation of youth are in control and want to double down on the policies that have crippled a significant portion of this generation of youth especially minorities and those who in any way are disadvantaged in the labor market. They honestly think that Communism creates jobs. They now have Dr. Piketty as their spiritual leader.

It has never worked before. I doubt it will work this time around and at some point those who have lost ten to twenty years of key aspects (really being an adult) of their life depending on the U.S. manifestation of Communism to make their lives better, may have an epiphany and decide that they wish something better than equality of misery for their children. The data is conflicting but my interpretation is that those over thirty benefit from the decrease in the supply of younger workers who have obtained experience in the workplace. Since those over thirty are benefiting from the misery inflicted on the youth of our Nation and given that those over thirty are more inclined to vote, we go further and further down this path to our peril.

It is sad to watch but it is the way things go. Housing is one place to see it in action. Prison populations is another. The desire to be permanently stoned is another. These cycles evolve slowly and it takes a long time to reverse them.

It should be obvious that these policies in the U.S. could not be followed if not for the success of fracking and horizontal drilling of oil and gas source rocks. This has allowed the U.S. economy to do well no matter how much punishment government inflicts on the working and middle classes. Generally speaking, those between 18 and 25 do not directly benefit from the shale boom. Some of course do but most do not. It does however keep the economy going so there is little scrutiny of the role of government in retarding economic recovery. It looks like even the most concerted efforts to restrain the economy may fail and the economy may begin to expand a bit faster despite the best efforts to keep the price of labor depressed by transferring part of the share which a production function would show is attributable to labor to the Bipartisan Oligarchy that runs the U.S.

Due to our natural endowments, the U.S. remains the best of the worst for many people but not for youth. They would be well advised to start over almost anywhere outside of the U.S.  And of course New Mexico is one of the worst places to be young in terms of economic opportunity. It is a shame that such a lovely place creates a very tough decision for younger people. But some percentage of the youth of New Mexico realize they must leave to be able to move forward and live normal lives.

In economics, impacts are determined at the margin so it does not take a large percentage of people leaving the state, not moving to the state, businesses leaving the state, or not moving into the state to have a significant impact on the economy of that state. And of course there is a negative feedback loop involved. If the economy in an area is not so good and the situation is less attractive than neighboring states, even a resulting small change in growth rate as compared to the growth rate in neighboring states can lead to the negative factors growing in importance for example by resulting in the need for higher tax rates leading to the acceleration of the process of becoming less appealing than neighboring states.

We see this in New Mexico and I believe it is very related to slow household formation in this state. Of course the official explanation is probably the Federal Government being stingy with New Mexico or Climate Change.

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