As originally envisioned, the mandate for How the World Works did not include covering every emerging data point about the United States' housing sector with the unseemly obsessiveness more usually associated with 9/11 Truth Movement conspiracy theorists. But when Dean Baker tells the world that the 6.5 percent drop in August pending home sales announced Tuesday is really "big news" we must pay attention, even though we suspect we are well over our quota of permissable alarmist housing posts for the last week and a half.
Baker is co-director of the left-ish think tank, the Center for Economic and Policy Research in Washington, D.C. He was one of the earliest economy-watchers to start ringing the alarm bell on the unsustainability of the housing boom.
And he was right.
...The drop in the index, which measures the number of contracts signed, follows a 10.7 percent drop reported for July. This is a truly extraordinary two-month decline of 16.5 percent. This is a new index (it began in 2000), so it is easily the sharpest fall on record, but it would likely have been the sharpest two month decline in contracts at any point in the post-war era. The actual falloff in sales is likely to be even larger, since a high percentage of these contracts will not close because buyers cannot arrange financing.
While it's possible that sales may stabilize and even rise back somewhat now that the mortgage markets are in somewhat better shape, they are now down more than 20 percent from year ago levels in this index and by more than 30 percent from the year-round average in 2005. The idea that the economy will somehow brush off a decline of this magnitude and keep moving along at a healthy pace seems almost bizarre. With consumption growth weak, equipment investment flat, and non-residential investment peaking, there is little other [than] trade driven by a falling dollar (and thereby higher import prices) to sustain growth.