January 02, 2012
Last summer news reports were filled with ill-informed predictions of a double-dip recession. Now there seem to be many accounts that misrepresent recent economic data to make a case for substantially stronger growth.
Robert Samuelson makes some of the standard errors in outlining a case for optimism. (In fairness, the column also presents a case for pessimism.) For example, he touts the jump in housing starts reported for November, saying, “Housing construction was up 9.3 percent in November over October and 24.3 percent over November 2010.”
The increase in starts reported in November was almost entirely attributable to a jump in starts reported for multi-family units. Multi-family starts are highly erratic and frequently have large month-to-month rises and falls. Starts of single-family homes were actually 1.5 percent below their November, 2010 level.
The piece also refers to a jump in pending home sales reported for November. This is a measure of contracts signed. The National Association of Realtors reports that many more contracts are now falling through than in the past, so this rise in contracts does not likely mean a corresponding rise in sales. (In this vein, purchase mortgage applications are running even with or below their year ago level.)
The column also notes that recent construction levels have been well below the number needed to keep even with household growth. This is correct, but we are still far from making up for the overbuilding of the bubble years as indicated by the fact that the vacancy rate remains at near record levels.
(There have been some questions raised about the accuracy of the Census Department’s data, claiming that it overstates the number of housing units in the country. Those raising the issue fail to note that measures of housing starts do not include housing units that were created by conversion of commercial or industrial property, such as an old warehouse being turned into condos. The rehabilitation of dilapidated units would also not be included in housing start numbers. There were many cases of both ways of adding to the housing stock during the bubble years. Also, it is important to note that the Census data is giving the percentage of units that are vacant. The critics of this measure must show how the Census methodology would lead it to overstate the share of units that are vacant.)
Finally, the piece notes that household debt levels have fallen since the beginning of the recession, implying that there could be a consumption boom as families are now better positioned to make major purchases. While debt is down, so is wealth. Households have lost close to $8 trillion in housing wealth and another $4 trillion in stock wealth. This would be expected to lead to a sharp drop in consumption through the wealth effect.
At present the saving rate is close to 4.0 percent. This is considerably above the near zero rate at the peak of the bubble, but well below the 8.0 percent average of the pre-bubble years. It seems more likely that, given this massive loss of wealth, the savings rate would be more likely to rise than fall, especially with tens of millions of baby boomers approaching retirement with the prospect of having almost nothing other than their Social Security to support them.
Addendum:
I see several comments that refer to the 2010 Census data and imply that it shows fewer vacancies than the quarterly survey numbers that I have been using. I am not sure what 2010 Census data these comments are referring to, but the ones I see show a higher vacancy rate than the quarterly data.
Table 1 of the 2010 Census publication on housing characteristics reports a total of 131,705,000 housing units. This is somewhat higher than the 130,517,000 units reported in the quarterly survey for the second quarter of 2010, the period in which most data collection took place. This implies that the survey had been understating the number of housing units, not overstating as some previous comments had claimed.
The 2010 Census data showed that 116,716,000 of these units were occupied for an occupancy rate of 88.6 percent. This is somewhat lower than the 88.9 percent occupancy rate shown in the quarterly survey data (Table 3, combining full and part-year occupancy). In short, if the 2010 Census is showing us that the quarterly data is understating occupancy and overstating vacancies, I’m not finding it in this publication.
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