Depression — no other word fits for what has happened to the housing industry in this country for the past six years. The big question: Is this housing depression finally coming to an end?
The U.S. Census Bureau released the latest data on housing starts and building permits in the middle of January. Compared to the previous month, the December numbers were disappointing.
Housing starts — the number of residential housing units upon which construction started during a month — came in at a seasonally adjusted annual rate of 657,000, down by 4.1 percent compared to November. Building permits, an indicator for new construction in coming months, came in for December at a seasonally adjusted annual rate of 679,000, basically flat (-0.1 percent) compared to November.
Where do these numbers fit in over the longer haul? Compared to a year earlier, housing starts were up 24.9 percent, and building permits rose by 7.8 percent in December. That’s positive. But do these notable increases signal a turnaround?
Let’s consider housing starts first. Over the past 31 months, housing starts have moved up and down in a range of 518,000 and 687,000. There’s been no breakout to the upside.
Previously, a 33-year high in housing starts was hit in January 2006 at 2,273,000. The subsequent decline took such starts all the way down to 478,000 in April 2009. That was the lowest level going back to 1959, as far as the Census Bureau provides data. Indeed, before the current housing depression, the previous low was 798,000, registered in January 1991.
For good measure, the average seasonally adjusted annual rate of housing starts from January 1959 through December 2011 was 1,480,000. So, the latest housing starts were down by 56 percent versus the 53-year average.
The story on building permits naturally is quite similar. From May 2009 to December 2011, building permits have ranged between 555,000 and 688,000. The 33-year high registered 2,263,000 in September 2005, falling to 513,000 in March 2009. Again, that low was an all-time bottom going back to data that begins in 1960. Before March 2009, the previous low was 709,000 in March 1975.
As for the average rate of building permits from January 1960 to December 2011, it came in at 1,387,000. Compared to that average, December 2011 building permits were off by 51 percent.
As for how this depression has played out then, a dramatic decline ran for three-and-a-half years, and since then, for another two-and-a-half years, we’ve more or less been bouncing around barely above depression level bottoms.
The depression scenario also is confirmed in the decline in real private fixed residential investment, according to GDP data, during this period. While overall real GDP grew by a pathetic 4.7% from the fourth quarter of 2005 to the third quarter of 2011, real residential fixed investment plummeted by a breathtaking 58 percent.
But what about all of the activity on the policy front over the past three-plus years to get housing moving?
The Federal Reserve has been running the easiest monetary policy in the history of our nation. The federal funds rate has been, effectively, at zero percent since late 2008. And the rate on a conventional 30-year mortgage has been driven to historic lows — below 4 percent.
Yet, there’s been no impact on the housing market. Of course, a big issue for banks is lending money over the long term at such historically low rates. After all, it’s hard to imagine rates staying this low, especially with the long-term inflation risks that accompany loose monetary policy.
At the same time, the Obama administration has pushed an agenda of doling out taxpayer dollars to aid in mortgage refinancings and modifications. The programs helped a fraction of the number of people the administration initially claimed they would. Meanwhile, the role of the government in the mortgage market — which was the central cause of the mortgage/housing meltdown due to subsidies, and legislation and regulation pushing political rather than economic criteria for mortgages — has actually expanded over the past three years.
And during his State of the Union address on January 24, President Obama proposed still more government intervention, with a plan mandating that mortgages be reworked for “responsible” homeowners to create $3,000 in annual savings, while taxing banks to pay for it. This is classic populist pandering. But how exactly can higher taxes on banks be positive for boosting lending on housing or on any other private sector endeavors? Obviously, they cannot.
In the end, the housing market will not begin a substantive recovery until the private sector is free from governmental costs, obstacles and uncertainties that have discouraged and restrained entrepreneurship, investment, economic growth and job creation. When elected officials shift overall policymaking in a pro-growth, pro-private-risk-taking direction, then the recovery will accelerate, employment will expand, and confidence will flow into home buying. And as we have seen in the past, a recovery in housing will further fuel the overall economic recovery.
If we ever get the policy mix right, then there’s no place to go but up from this housing depression. But clear economic thinking on policymaking has been tough to come by in recent years.
Raymond J. Keating is the chief economist for the Small Business & Entrepreneurship Council. His new book is “Chuck” vs. the Business World: Business Tips on TV.