Has Housing Bottomed In the US? Data and Fifth Grade Math Says NO
Act I. Scene - a fifth grade math class in a small farm town in MO.
"Good morning class."
"Good morning, Mr. Scambuster."
"What state we are in and what are we known for, Freckles?"
"Why, Missouri, sir. When shrills trained at Serve-the-Crooks League that you told us about try to tell us that this is so and that is so we turn around and ask, 'Show Me, buster.'"
"Class, today we will learn how to apply the arithmetic that you have learned to the real world problems. Remember, when we took a field trip to the city and we saw lots of homes and condos going up everywhere? Remember, Tommy pointing to us that his uncle Kirk was building some of those homes? I also explained to you the process of getting permits to build homes, etc., on that trip. Well, today we will apply the simple arithmetic of addition and subtraction to this real life subject. I will draw a little table of the process of building new housing units."
For the Year Ending In September 2006:
Number of Housing Units added in a year (Supply) = 2,100,000
Increase In Number of Housing Units Occupied in a year (Demand) = 1,200,000
For the Month of November 2006:
Number of New Housing Units For Which Permits Were Filed = 1,500,000
Number of Housing Units Started = 1,600,000
"OK, Tommy, you see the first two numbers in the table, what do these numbers mean?"
"People were building lot more homes than what the demand was there, sir, by 900,000 in just one year. Grandpa Mitchell says, sir, it's no use building them homes and have them lie empty. He told uncle Kirk that it is plain stupid to keep building more when the ones he had built haven't sold and some are still sitting empty. Sir, how long have they been building more homes than the need?"
"For some five years, Tommy. Barbie, what do the rest of numbers tell you?"
"Why, sir, they are still planning to keep building more homes than the need for quite a while, no?
"Yes, and what would that do to the number of empty homes?
Tommy: "They will keep going up, sir. More and more of them empty homes and they will keep piling up. Is uncle Kirk going to be in trouble, sir?"
"I am afraid so, Tommy."
Act II. Scene - the first day of economics course for the incoming MBA class at Hardasses, one of the Serve-the-Crooks League schools, in Cadbury, Mentalcases. Prof. Crooksman enters the class and wastes no time in delivering the lecture.
"Good afternoon, class, and welcome to Hardasses. I want to make sure that everyone understands the real purpose behind what we train you for - to Serve the Crooks, because that is where the rewards of a good life are and we know why you chose Hardasses over the lesser schools. Our tools are age-old - manipulation, spin, etc. - but with the latest knowledge and techniques applied to them Truth must be used selectively and sparingly. There is no area that requires greater care than how to handle the truth, or indisputable facts, and how to spin the facts. Staying clear of certain facts is essential to Serve the Crooks. Shortly, we shall look at one such example.
"I know many of you are shooting for the top jobs on Wealth Street. Some of you even have dreams of joining the ranks of the Crooks, as Ms. Fraudman's father just did at Goldchain Silverknife (Ms. Fraudman nodes). Some of you may harbor bigger ambition of serving the Crooks in the highest capacity at Fraudulent Reserve. I am especially proud of my student, Alan Conman, who was appointed to the Fraudulent reserve, who couldn't turn water into wine but he is so good with the spin that he makes people think that they are drinking wine when they are drinking tap water. People are simply mesmerized by his delivery. That is the kind of skill that I wish you will develop."
"Look at this figure, a sad example of what lies ahead for the housing mess. Yes, it is a one big mess, maybe the biggest mess ever that I know of. Now, you never want to make the mistake of ever getting such a graph out to the public. You keep this to yourself and find some other facts that you can spin. For example, Housing Scams are up, permits are down 30%, and housing starts are down 26% from year earlier. Then, summarily claim that the housing is in the process or bottoming or has already bottomed. You never want to give a number for what the current rate of the housing demand is, unless you can quote someone's false claims about the demand. Use vague phrases like demographics, immigrants, to give a sense of demand far greater than the actual demand shown by the survey data."
"This graph is equally damning for your future employers. Not only no bottom is in sight, but also because for things to bottom in housing, the permits and new constriction would have to drop to less than the third of the current lowered rates and to the fifth of the peak rate in 2005Q3, for at least two years."
"In the meanwhile, the 3,000,000 empty housing units added since 2002 will swell to 4,000,000 by the end of 2007 due to what is in the pipeline already (this, of course, is in addition to the 9,500,000 empty units at the beginning of 2002). This will bring the Total Vacant Units, Year Round, to 13.5-14 million by the end of 2007, or beginning of 2008. God help all those who need to sell homes and those who are heavily leveraged.
"The plan to turn homes into Debt Concentration Camps was hatched by none other than Alan Conman and Crooks couldn't thank him enough because they saw an opportunity to make few trillion extra dollars from the scheme over the past four years. Needless to say, all this stays in the class and mum is the word. I simply can't overemphasize the need to use truth and facts with the greatest of care. Our tools for success and good life are - manipulation and spin. Hell, I own a country house in Maine and a good-sized boat. How do you think an academic like me came to such privileges?"
"Remember, at Hardasses we don't mind getting our butt kicked, because it is the kicker who feels the hurt!"
"That's all for today."
Act III. Scene - graduate level economics class at Warts Business School taught my Prof. Seagull, a popular author and propagandist.
"Students, I can tell you from personal experience that there is no more rewarding business than the spin business in the areas of investments and economics. Don't be fooled that the spin works only in politics. The field is a very fertile for creative minds and our ruling Crooks are always looking for the best and the brightest who can spin the facts like a magician, without people being able to figure out how. We have let the Asians do most of the creative work in science and technology so that we can focus on creativity in finance - creating wealth out of thin air, without producing any good or needed service! We have achieved nirvana in the area of managing the economy, which allows American People to consume more than they produce for what seems like forever.
"I will show you how to spin with an example in an area of great interest (concern, I might add) to our benefactors, the Crooks, and that area these days happens to be housing. There is a survey-based index of business conditions in the homebuilding industry, National Association of Homebuilders (NAHB) Index. This index has been near its bottom for the past three months around 32-34. So, you go and tell the public, "See, the housing is bottoming," because the graph of this index seems like stabilizing at the bottom levels. Now, in layman's terms what the index value (remember that this is a diffusion index and I explained to you what that says) really means can be summarized as:
Index Level Business Conditions
80 Out of this world
50 Not bad, not good, OK
30 Very Bad
20 Horrible, beyond belief
"So, you see, the conditions continue to be between Bad and Very Bad. For things to be close to have bottomed, the index should be around 50 for 2-3 months and we might be long time away from that if we look at the supply-demand imbalance that has been built over the past few years. Therefore, there is no need to bring the subject of over-supply and how that can only continue to get worse for at least a year because of the supply pipeline. Juts use an index, or something, that the public doesn't fully understand. Scams going up is a God's gift to us spin-meisters. We can cover up many negatives in the economy and the dirty deeds of our masters when Scams are going up."
"That's all. See you, next time."
Curtains. The play is over.