Friday, August 22, 2008
The housing market debacle started with the collapse of the sub-prime mortgage market in August 2007. Thankfully, the Fed and Congress rallied, putting expansionary policy in place. The 3.25% reduction in short-term interest rates and $100 billion in tax rebate checks helped to keep the economy afloat as the housing market sank quicker than the Titanic.
However, in retrospect, it is easy to see that it was a mix of problems, including irrational building projects. The chart below shows the 3-month average annual change of existing home sales spanning the years 2004 to 2008 across the four US census regions.
By December 2005, existing home sales in the Northeast, Midwest, and South marked 0% or negative growth. The South plummeted one year later.
By the beginning of 2006, sales were already declining.
But homebuilders were still building. The table below lists the 10 states with the highest growth in housing units, measured by the Census, for the years 2006 and 2007.
The irrational homebuilders were caught with their pants down. It doesn’t make sense to start new projects when you can’t get rid of the ones you already finished.
Please leave comments. Best, Nontruths