Generational Dynamics: Forecasting America's Destiny Generational
 Forecasting America's Destiny ... and the World's


Generational Dynamics Web Log for 25-Aug-06
Housing market is collapsing faster than economists expected

Web Log - August, 2006

Housing market is collapsing faster than economists expected

Both existing home and new home are falling much more sharply than pundits and analysts have predicted.

On Wednesday, the Realtor's trade group announced that July sales of previously-owned homes were down 4.1% from June and down 11.2% from July of last year. The fall from June to July was about 5 times as great as economists had predicted.

On Thursday, the Commerce Dept. announced (PDF) that July new home sales fell 4.3% from June, about 20% greater than economists had predicted, and down 22% from the same time last year.

As I've discussed a couple of times in the past, the "housing bubble" appears to have burst in October 2005. The housing market has been generally down since then.

Existing home sales and prices, seasonally adjusted, January 2003 to July 2006, showing effects of October 2005 bubble bursting. The "inventory" value is shown on the bottom graphs, both in numbers of units and in number of months backlog at current sales pace.
Existing home sales and prices, seasonally adjusted, January 2003 to July 2006, showing effects of October 2005 bubble bursting. The "inventory" value is shown on the bottom graphs, both in numbers of units and in number of months backlog at current sales pace.

The above four graphs show the performance of existing home sales since 2003. You can see how the real estate bubble grew from the increasing sales of homes and the increasing prices of homes. In the lower graphs, you can see that sales were so brisk at the beginning of 2005 that inventory was way down; that's when price increases started accelerating.

The bubble appears to have burst in October 2005, when the housing inventory really shot up and sales went down. However, prices have NOT fallen substantially, indicating that sellers are still in a state of denial, and are hoping that the market will come back.

As the inventory continues to build up, the situation is right for a full-scale real-estate panic.

Here are the similar graphs for new home sales:

New home sales and prices, seasonally adjusted, January 2000 to July 2006, showing effects of October 2005 bubble bursting. The "inventory" value is shown on the bottom graphs, both in numbers of units and in number of months backlog at current sales pace.
New home sales and prices, seasonally adjusted, January 2000 to July 2006, showing effects of October 2005 bubble bursting. The "inventory" value is shown on the bottom graphs, both in numbers of units and in number of months backlog at current sales pace.

Related Articles

Stocks, credit and risk continue their bubblicious rise: The stock market has reached a fresh record high almost every day... (19-Nov-06)
As stock market bubble skyrockets, risk premiums are collapsing: Desperate investors appear willing to take any risk these days to get returns.... (10-Nov-06)
Alan Greenspan blames the housing bubble on the fall of the Berlin Wall: Meanwhile, the stock market keeps skyrocketing and appears unstoppable to many investors.... (25-Oct-06)
System Dynamics and the Failure of Macroeconomics Theory : Mainstream macroeconomic theory, invented by Maynard Keynes in the 1930s, has failed to predict or explain anything that's happened since the bubble started, including the bubble itself. We need a new "Dynamic Macroeconomics" theory. (25-Oct-2006)
August trade deficit reaches fresh historic high -- that's GOOD NEWS, say economists: The deficit, up 2.7% from July's historic high, exceeds even the highest of economists' estimates,... (12-Oct-06)
Following the real estate bubble, the commodity bubble appears to be deflating: As real estate prices collapse, prices of oil, copper, sugar and other commodities reverse four years of record price increases.... (23-Sep-06)
Corporate profit growth slowed substantially in second quarter: This may be the start of the long-term "mean reversion" cycle that readjusts corporate earnings substantially downward.... (31-Aug-06)
Housing market is collapsing faster than economists expected: Both existing home and new home are falling much more sharply... (25-Aug-06)
Speculations about a stock market panic and crash : Will there be a stock market panic next week, next month, or next year, and will it lead to a crash? We speculate on some possibilities. (31-May-2006)
As stock markets melt down, the question is: Where's all the money going?: For the first time, analysts are debating whether the stock market is crashing.... (21-May-06)
Housing prices continue to fall: Sales volume partially recovered, indicating that you can still sell, if you lower the price enough.... (28-Apr-06)
India Sensex stock market reaches historic high in record time.: Startled analysts are debating whether the market is close to a crash.... (21-Apr-06)
New home sales and prices fall dramatically four months in a row: This appears to confirm that the housing bubble burst four months ago.... (26-Mar-06)
Trade deficit again worse than expected, reaches a fresh historic high: Related: US Treasury bond prices fall dramatically on news from Japan... (11-Mar-06)
Sudden collapse of Iceland krona portends bursting of "carry trade" bubble: I don't normally write about international interest rates because... (27-Feb-06)
New Fed Chairman Ben Bernanke gives predictable upbeat testimony to Congress: Pundits are smiling today, happy that they can understand "plain-speaking" Bernanke.... (17-Feb-06)
China reports 2005 economy still overheated at 9.9% growth: Like a railroad train careening down the track out of control,... (26-Jan-06)
Alan Greenspan gives another harsh doom and gloom speech: Saying that "the consequences for the U.S. economy of doing nothing could be severe,"... (4-Dec-05)
Ben S. Bernanke: The man without agony : Bernanke and Greenspan are as different as night and day, despite what the pundits say. (29-Oct-2005)
Fed Chairman Alan Greenspan says that the deficit is out of control: France's Finance Minister Thierry Breton quoted Greenspan... (25-Sep-05)
Pimco's Bill Gross recommends selling all, buying only short-term Treasuries: Meanwhile, Morgan Stanley's Stephen Roach says, "The world as we know it must come to an end."... (18-Sep-05)
Departing Fed Chairman Alan Greenspan sings schizophrenic swan song: Is the economy strong or is it in danger? Greenspan played both sides... (30-Aug-05)
A new mystery: Why is the P/E ratio remaining constant?: If you look at the bottom of this web site's home page,... (11-Aug-05)
The 11% Solution: An article in Barron's says the stock market is very overvalued : New research by analyst Adam Barth finds that average earnings over any 20-year period are surprisingly constant. (11-Jul-2005)
The mysterious Baltic Dry Index reveals a great deal about the Chinese economy: China is causing wild volatility and turmoil in shipping, iron ore and steel prices,... (5-Jul-05)
Alan Greenspan predicts major losses by hedge funds: But still says he doesn't have a clue why 10-year Treasury bond interest rates are falling.... (8-Jun-05)
Fed Governor Ben Bernanke blames America's sky-high public debt on other nations: I'm normally wary of applying specific generational archetypes to individuals, but Bernanke is acting like a Baby Boomer.... (14-Mar-05)
Alan Greenspan warns that global economic dangers are without historical precedent : In a speech on Friday, Greenspan buried a major change of position in a speech admitting that his assumptions about the economy for the last decade were wrong. (6-Feb-2005)
Federal Reserve congratulates itself on jawboning policy: Fed says it propelled the economy upward merely by promising to keep interest rates low.... (17-Sep-04)
Real estate is in an overpriced bubble all over the world: A study by investment bankers Morgan Stanley warns that the bubble will burst with devastating results.... (30-Jul-04)

Generally speaking, new home sales are a more accurate indicator than existing home sales, because new home sales are recorded when a contract is signed, while purchases of existing homes are calculated when the sale is closed, usually a month or two later.

Inventories of new homes have been going up, just like existing homes, but there's a difference in pricing: New home prices have been falling, because new homes are sold by construction firms that have a smaller emotional attachment to the homes they're selling.

Generational Dynamics has been predicting since 2002 that we're entering a new 1930s style Great Depression, most likely by the 2006-2007 time frame.

There is one essential item that's still missing: a good ol' fashioned stock market panic. As I described in my May 30 essay, "Speculations about a stock market panic and crash," we're overdue for a panic, and there's a 50-50 chance that one will occur this year, in the next few months. There are many things today that might trigger a panic, and one of those things is the rapidly increasing levels of new and existing home inventories.

Few people today have any idea what a panic is. The last panic occurred in America in 1987, but as I've described, this was a "false panic," since stocks were actually underpriced at that time.

The previous panic occurred in October 1929, when stocks were overpriced by a factor of more than 200% -- same as today.

If you have no idea what a panic is, I can only say that you'll know it when you see it. We've had a couple of close calls this year, but when a real panic occurs, you'll see a worldwide collapse of confidence in the markets, and a rapid increase in unemployment, homelessness, bankruptcies, and worldwide social instability. (25-Aug-06) Permanent Link
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