Tuesday, June 28, 2011

Did you know?

Farmers (generally) are doing well. Prices are up, loans are cheap, profits are flowing.

Science continues to make advances that make better crops, lower costs, etc.

Sunday, June 19, 2011

Housing rules

A long-time rule of thumb for the US economy is that it follows, in large part, the direction of the housing industry. Recessions and recoveries often follow booms and busts in housing. Housing, in turn, would usually follow increases and decreases in interest rates. When interest rates went down, more people could afford mortgages. The demand for new houses would pick up, leading to increased employment in the building trades. New houses also meant that people needed stoves, refrigerators and a host of other durable and non-durable goods. Factories would need to hire more people to meet renewed demand, and the economy would go into an upswing.

Usually this upswing would follow a period of comparatively high interest rates, during which demand for housing had fallen. Home valuations would often stagnate during these times. Sometimes prices would even fall due to decreased demand. When the break in interest rates came, the combination of low rates and buyer-friendly real estate prices would usually lead to a brisk recovery.

The real estate boom that ended in about 2007 has been called the longest and most sustained such boom in living memory. In the aftermath, we are continuing to see weakness in the housing industry, despite the fact that about four years have gone by since the collapse.

The Federal Reserve has attempted to revive the economy by pouring money into it and by keeping interest rates at rock-bottom levels. Such measures usually work, but as noted above, the housing market has usually by this point come back down to an affordable level, and excess capacity has been used up. So far that has not happened this time. We could reach the bottom any time now, but at this point we do not know exactly when. In reality we will not know until we see the statistics reverse direction and start to move upward. We will only know about it after the fact, when all the numbers have come in and have been added up.

One funny thing about us as economic creatures is that we commonly tend to think that the current trend will go on forever. When housing prices are going up, we think they will always go up. When they go down, we fear that the decline will go on interminably. But trends do change.

In my opinion, the Federal Reserve has an interesting situation that it is continuing to deal with. The housing decline is a severe deflationary force in the economy. The actions the Fed has taken, which many people point to as alarmingly inflationary, have not stopped the deflation of that segment of the economy. Other segments of the economy show signs of inflation, but housing has continued to go down.

Since housing is such a major force in the economy, the Fed's actions are a little bit like spitting in the wind. The analogy is not perfect, because the Fed's actions have had an effect--mainly in preventing disaster. But the economy cannot recover fully until housing completes its shakeout.

Of course we have not covered here all the things that have gone wrong or been done wrong in the last few years. However, the trend of the housing industry still stands as a key indicator to watch.