Wednesday, November 26, 2008

Economic Reports: We're Not Out Yet

Several numbers were released today, including weekly jobless claims (released early due to holiday on Thursday), none of which pointed to the bottom of economic activity. I would like to focus on Durable Goods and New Home Sales:

Examples of durable goods are automobiles, household appliances and home furnishings; goods with an expected life of 3 years or so. This is a glimpse into the follow on effects of the housing crunch. Not only will there be lower demand for durable goods because of fewer housing transactions, but the elimination of the home equity "ATM" will have a dampening effect on the normal renewal cycle. This is the first time since 2005 that this number has come in below $200 billion and the lowest since April of that year.

New home sales dropped to an annualized rate of 433,000. At that rate, it would take a little over 5 YEARS to eliminate the number of vacant housing units. That is assuming that there is no addition to the housing supply over that time span. This is the result of the rampant real estate speculation that occurred over the last 7 years. Individuals purchased homes as investment vehicles, hoping to turn the house for a profit. However, in order for a house to ultimately be useful, household creation must take place. Remember, a house depreciates and is replaceable. It is a manufactured good and it costs money to keep a house in operating order. This carry cost can seriously impact return on investment. The supply of housing has barely corrected and more price declines are imminent.

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