Just when everyone was certain that long term rates would rise, they fell. Wednesday's 10-year T-note auction drew more bidders than any since '94, and its yield thumped down from near 4.00% to 3.85%, mortgages back down to 5.125%. The improvement is gradually reversing, but for the moment we're okay.
An $11.5 billion dive in consumer credit in February more than wiped out a revised gain in January, the first in 11 months. New claims for unemployment insurance were supposed to continue improvement, dropping to 433,000, but jumped to 460,000. Careful with the hosannas to March retail sales: the measure that jumped 9% was a year-over-year comparison, and March last year was the pit of panic.
The easy Treasury auction revealed the enormous gulf between the noisy sustained-recovery believers, and the quiet skeptics who elbowed to buy the bonds. Perfesser Bernanke laid it out this week: "We are still far from being out of the woods. Many Americans are still grappling with unemployment or foreclosure, or both."
Along the whole length of disagreement, the widest spot in the canyon: those who understand the impact of housing on the economy, and those who do not.
Many have believed with some merit that too many American resources have gone to housing: too much credit, too many tax benefits, too much consumption, houses too big, and too much assistance to undeserving wannbe owners. Others have believed the same things with little merit: those who think everybody should put more money into the stock market instead of those silly houses.
Nothing like a blown bubble to create momentum for re-allocation. Certified good-guy, Fed vice-chair Donald Kohn in his most recent pre-retirement farewell: "Housing is almost certainly going to be a smaller part of the economy than it was when lax credit standards encouraged overbuilding and over-borrowing."
That's fine: no more lax standards. However, Kohn went on: "Households need to continue rebuilding wealth. They became too indebted and too dependent on housing wealth to finance current purchases and provide for future events like the education of their children and their retirement. Now they need to repay debt and save more out of current income." You hear some version of that every day, but not from senior policy makers. The reason: Americans have not saved significant sums since the 1970s, and have never "built wealth" by saving from current income. We build wealth just like everyone else on earth, by the rising values of our assets.
From Kohn to the Fed's loony bin... Minneapolis Fed president Kocherlakota on Tuesday: "Yes, the housing sector is important, but residential investment makes up just 2.8% of the country's GDP. We can -- I believe that we will -- have significant growth in output without seeing a major turnaround in the housing market."
Wow. Sonny, don't believe everything that pops into your head. Talk like that makes me feel like the alumnus who hears his college football team will be "de-emphasized."
The GDP contribution of residential construction is indeed minor. However, there are other accounts. From 2002-2008, "mortgage equity extraction" as measured by the Fed often contributed as much as 8% of disposable income -- 10% in 2005. Without that addition (clearly with Greenspan's assent, clearly overdone), every GDP analysis has shown that the US would not have emerged from the '01 recession. MEW has been subtracting from income since the 2nd quarter of 2008, an overpowering headwind.
Then there's the consumption-crimping and demoralizing hit to household net worth, $7 trillion lost. And the huge, ongoing, and unrecognized losses to banks, impairing their ability to lend, and feeding a downward spiral in asset values.
Housing will get help, sooner or later (credit!). And we'll muddle, and adapt. Even if the housing de-emphasizers have their decade, we'll still out-fox ‘em. It will take time, but one genetic imperative drives homo sapiens harder than any besides sustenance and reproduction: the determination next year to live in a better cave.
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