New American Paradigm

Why Are Housing Starts Up?

Some pundits are pointing to increased housing starts as a sign the economy is recovering. 

Don't be fooled.

A couple things are happening.  As Paul Krugman, Nobel Laureate economist and liberal conscience, notes, a 17% increase in next to nothing is still next to nothing.

new-home construction has come to a virtual standstill, so even large percentage changes mean only a handful of extra homes started. If we’re building 6 homes a month nationwide, and that goes to 7, it’s a 17 percent rise — but makes almost no difference in real life.

There's another issue at hand as well.  In many markets developed lots are in such oversupply they will take years to absorb.  In most cases that means banks have repossessed them from leveraged developers who cannot unload them in a timely fashion. 

Not wanting vacant land on their books, banks are selling lots at firesale prices which makes selling a new home on them competitive with existing homes.  Builders who have survived the crash but sit twiddling their thumbs have nothing to risk snapping up these cheap lots.

Once those developed lots are absorbed, there won't be any new ones for a long times with snakebitten banks reluctant to lend on such projects.

To put it another way, vultures picking at a corpse laying in the desert sun is no sign of health.

The Way We Were

Typically while suffering in the midst of a recession , Americans can take solace in the fact that the economy can get out of its funk by going back to doing what it was doing before.  Typically....

The problem for us right now is that we can't go back to what got us in this mess.  Unlike normal cyclical ups and downs, our economy for the last several years has been built on a massive expansion of personal debt.  Worse, that personal debt has now been socialized through government bailouts on the bad real estate loans that were used to finance this asset bubble. 

Economists View has the details:

U.S. Household Deleveraging and Future Consumption Growth, by Reuven Glick and Kevin J. Lansing, FRBSF Economic Letter: U.S. household leverage, as measured by the ratio of debt to personal disposable income, increased modestly from 55% in 1960 to 65% by the mid-1980s. Then, over the next two decades, leverage proceeded to more than double, reaching an all-time high of 133% in 2007. That dramatic rise in debt was accompanied by a steady decline in the personal saving rate. The combination of higher debt and lower saving enabled personal consumption expenditures to grow faster than disposable income, providing a significant boost to U.S. economic growth over the period.

We're all waking up with a hangover promising never to do THAT again which means people are dramatically changing their behavior.  That means saving more, taking on less debt, and in turn, buying much much less.  In a consumer driven economy, that means the economy will not be recovering any time soon.

Sometimes paradigm shifts are painful.

Going forward, it seems probable that many U.S. households will reduce their debt. If accomplished through increased saving, the de-leveraging process could result in a substantial and prolonged slowdown in consumer spending relative to pre-recession growth rates.

So how will this recovery look?  I think we're seeing the canary in the proverbial coalmine in Starbucks.  Is there a better example of the "spend today worry tomorrow" economy than an empire built on $5 flavored coffees?  Don't get me wrong, I've grown up in Western Washington so I take my espresso intravenously, though I still refuse to forgive Howard Schultz for selling our beloved  Sonics.  But it appears I'm not the only one who has trouble seeing how Starbucks fits into this shift in American spending behavior.

Maybe the worst nightmare is this: What if Starbucks is an artifact of an economy that's not coming back? A time of rising, if fleeting, American affluence as we moved from dot-coms and telecoms, to day trading and house flipping, all based on the biggest run-up of debt in the history of the world. For this venti, triple-shot America, it might have been the quintessential bubble drink.

Here's the part I'm having trouble figuring.  Each time things look bad we have some new whizbang industry to pull us out of our funk.  In the 90's we had the internet.  2000's the financial industry.  What is it going to be this time?  I haven't got a clue and that's frightening.  Worse, our political leadership appears to be so clueless about how to actually help create jobs, that they would rather through billions at a dying company that help support growing companies.

Go figure.

Why Are Americans Driving Less?

Infrastructurist has the details on some great news.  Americans are driving less, ending a steady climb in vehicle miles traveled since... well forever.

 

But it brings up an interesting question.  Is this really a change in behavior or just a reaction to increase in unemployment and reduction in discretionary trips.  Nate Silver, of FiveThirtyEight fame, takes a stab at digging into the stats.  Even though he was wrong about the Oscars, he's right about everything else.  He figures:

Healthy Cities Healthy Economy

The Congress for New Urbanism, commissioned by a group called CEOs for Cities, released the results of a study on how New Urbanist growth strategies pays off economic dividends.  If you watch the video, try your best to ignore the awful music, they apparently spent all their money on the research itself. 

The study found that the recent push for growth into rural areas has had disastrous results which we've explored here and here.  Perhaps most importantly, it finds that returning to development in cities over exurbs, is the key ingredient to solving any number of our nation's most pressing problems.   Haven't we all been searching for a silver bullet for climate change, lack of affordable housing, obesity, and excessive personal and public debt?

End of Sprawl? Part II

Previously in part one of this series I talked a bit about how an obscure issue like land use had made it onto the President's radar.  After all, it's not like he doesn't have other things to worry about.  Yesterday President Obama said:

"I know a lot of you are worried about Iran's nuclear program and the implications it has on Middle East peace, but today I'd like to talk about the proposed strip mall in South Hill."

Ok he didn't really say that, but he has talked about the impact of urban sprawl and it's role in our current economic problems.  So today I'm going to describe the economics of sprawl and how it rears it's head in unexpected places.

First, to understand the problem you have to remember that first rule of real estate.  No, don't believe what Alec Baldwin told you, it's not Always Be Closing.

It's location, location, location.  Though local market conditions vary, as a general rule the closer to jobs and services one is, the more expensive the real estate.  Though things like views, crime, waterfront, quality schools and good antiquing can add value, you're going to save money by moving to rural areas.  That combined with absurdly cheap and convenient transportation in cars drives people further and further from town.