This is Not Supposed to Happen

Gluskin Sheff

David Rosenberg

January 28, 2010

THIS IS NOT SUPPOSED TO HAPPEN

We could really care less if it was a frostier than normal December; it’s not as if it snowed in July (especially in the south where sales dropped more than 7%). We have the most stimulative fiscal and monetary polices ever concocted to support a recovery in the U.S. housing market, in addition to record affordability levels and the long reach of the FHA near 0% financing, and yet new home sales collapsed 7.6% MoM to a mere 342,000 units at an annual rate. This was the fifth weakest month in the past 45 years — sales of completed homes, in fact, were at their lowest levels ever and down 38% from the already-depressed levels of a year ago.

The inventory backlog, as was the case in the resale data, jumped to 8.1 months’ supply from 7.6 months in November, to stand at its highest level in six months. This is sure to exert downward pressure on housing values. In addition, as a sign of how tough it is to lure buyers to the showrooms, it took builders a median of 13.9 months — by far a record and 50% longer than a year ago — to sell a completed unit. During the boom times, it took a mere four months to make a sale upon completion.

The economy may be suffering from an ailment known to economists as ‘Ricardian Equivalence’ — when fiscal stimulus on top of a record debt burden causes ‘economic agents’ to not respond because they realize that by the government probing the outer limits of deficit finance, higher taxes are what lies ahead. So what people do is save, not spend. In fact, a just-released CNN/Opinion Research poll found that 56% of the American public now oppose more fiscal stimulus; 42% are in favour of more largesse.

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