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Generational Dynamics Web Log for 24-Jun-2010
24-Jun-10 News -- May new home sales plunge to lowest level on record

Web Log - June, 2010

24-Jun-10 News -- May new home sales plunge to lowest level on record

PKK terrorists in Turkey may have taken advantage of Gaza flotilla incident

May new home sales plunge to lowest level on record

New home sales in May fell 33% from April, down 18% from May of last year, to an annual purchase rate of 300,000 units. Economists had forecast that the rate would be 410,000 units, according to Bloomberg. Furthermore, the government revised it's April purchase rate substantially, to 446,000 down from the previously reported 504,000.

These grim data values are consistent with other trend values that are all declining, according to the article: sales of existing homes, housing starts, building permits, builder confidence and mortgage applications have all declined.

The fall in home sales is blamed on the expiration of the federal government's home buyer tax credit, which provided up to $8,000 in credit to home buyers who entered into a contract by April 30.

"I expected housing numbers to go down, but I didn't expect them to go off a cliff," said one financial expert that I heard on TV on Wednesday.

Well, why didn't he expect them to fall off a cliff? I knew they were going to fall off a cliff, as I wrote in an article earlier this month. (See "7-Jun-10 News -- Globally, May was a month of ominous events.")

How many months have we heard these airhead "experts" come on TV and say that a V-shaped recovery was only a month away? 12 months? 24 months? 36 months? How many times are these guys going to be surprised? It's really disgusting. Most of what you hear on TV and read on other web sites besides this one is total nonsense.

Here's another angle. We keep hearing that the housing bubble began in 2003, and was caused by low interest rates set by Alan Greenspan's Fed. Well, the Fed funding rate is now close to zero, and mortgage rates are the lowest since 1953. If low interest rates cause a housing bubble, then how come there's no real estate bubble today? (See "The global housing bubble began in the mid-1990s.")

Home sales have MUCH farther to fall

In commenting on the collapse in May new home sales, the Calculated Risk blog provided the following graph of new home sales since 1963 (the dark blue bars indicate periods of recession):

May new home sales <font face=Arial size=-2>(Source: Calculated Risk)</font>

May new home sales (Source: Calculated Risk)

I've modified the above graph to show why new home sales have much farther to fall:

The horizontal blue line is the long-term average number of new home sales. (This should actually be a gently rising curve, but to compensate I've made it a straight line a bit higher than the actual average.)

The real estate bubble began around 1995, the same as the dot-com bubble.

The new home sales were well above average from 1995 to 2008. That's 13 years.

New home sales have only been below average for 2.5 years.

In order to maintain the same average, new home sales have to be below average for roughly the same period of time, 13 years, and by roughly the same amount.

This is the Law of Mean Reversion that I've referenced so many times on this web site. I didn't make up the Law of Mean Reversion. And the Law of Mean Reversion is not rocket science. It simply says that the average in the future will equal the average in the past. I simply apply it to ordinary situations in a way that anyone who's taken Economics 1.01 should have no trouble understanding.

The point is that home sales have MUCH farther to fall.

Here's something to cheer you up

If all this gloomy news is making you sad, here's a song on YouTube from 1951 that's sure to cheer you up. It's the original recording of "Mockingbird Hill" by the Pinetoppers:

    Tra la la twiddledee dee dee it gives me a thrill
    To wake up in the morning to the mockingbird's trill
    Tra la la twiddledee dee dee there's peace and goodwill
    You're welcome as the flowers on mockingbird hill

If that doesn't cheer you up, then I don't know what will.

Additional links

The PKK terrorists may have increased their attacks on Turkey to take advantage of Turkey's reaction to the botched Israeli commando raid on the Gaza flotilla. "The PKK may be thinking that the U.S. and especially Israel will understand, welcome and, in Israel's case, even support anything that creates trouble for Turkey," says one expert. Global Post

The Federal Reserve announced on Wednesday that it would keep interest rates near zero for "an extended period," in light of continuing threats to economic growth, including "developments abroad." This is the most negative Federal Open Market Committee report in a very long time. NY Times

One of the arguments for the validity of Generational Dynamics theory is that groups of humans must evolve to have wars of extermination with other groups of humans, so that survival of the fittest will produce the most intelligence. A new 10-year study of a colony of chimpanzees in Africa has found that they will conduct war with another colony of chimpanzees in order to capture territory. NY Times

This is an interesting story about the status of the relief wells being drilled in the Gulf of Mexico to end the oil spill. nola.com

Throughout China's history, government officials were expected to serve until their dying days. But now, younger generation officials are demanding that older officials retire and stop meddling in government affairs. Asia Times

Singapore, Malaysia and Vietnam are joining the U.S. and China in having submarines patrol in the South China Sea. Asia Sentinel

For a while, it seemed that America would lose to Algeria in World Cup soccer, but then, at the last minute, for Landon Donavan "it was as if time slowed down. The net was unguarded; the ball was at his feet. And he knocked it in for the biggest goal of his career." Washington Post

After Algeria's devastating World Cup loss to America on Wednesday, Algerians in central Paris smashed shop windows and incinerated cars. Vanity Fair. This followed the Tuesday defeat of the French team , whose members are being accused of racism and worse, after misbehaving so thoroughly as to have humiliated all of France. NY Times

Thailand's Prime Minister Abhisit Vejjajiva is refusing to honor his promises to compromise with the red-shirt protesters, and instead is turning the screws by freezing their bank accounts. This will further deepen the rage across the fault line between the wealthy fair-skinned Thai-Chinese elite and the indigenous dark-skinned laborers. Asia Sentinel

(Comments: For reader comments, questions and discussion, see the 24-Jun-10 News -- May new home sales plunge to lowest level on record thread of the Generational Dynamics forum. Comments may be posted anonymously.) (24-Jun-2010) Permanent Link
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