Glut of unsold homes threatens U.S. recovery

August 24, 2010 | Last updated on August 24, 2010
2 min read

Housing’s tentacles reach into so many sectors of the economy — everything from finance and furnishings to food and fuel — and it has a solid track record of hinting when an economy is slipping into, or climbing out of, recession.

So it comes as no surprise that many see this week’s shabby existing home sales report as a sign the fragile U.S. economy could falter. It’s a legitimate fear, given the crash was triggered by an insane real estate bubble that sent so many housing dependent industries sliding down the skids.

Sales of previously occupied U.S. homes plunged last month to their lowest level in 15 years, despite rock bottom mortgage rates and bargain prices in many areas.

July’s sales fell more than 27% to a seasonally adjusted annual rate of 3.83 million units, the National Association of Realtors said Tuesday. It was the largest monthly drop since that organization started keeping records in 1968. Sharp declines were recorded in all U.S. regions.

While economists have cautioned this drop bodes badly for the fragile recovery, what these dreary numbers actually reflect is something that’s less discussed.

The unpleasant truth is there’s still too much vacant housing stock left over from the height of the bubble: A combination of massive overbuilding during the boom years and post-crash policy errors that led to far too many homes being abandoned to foreclosure.

Indeed, the Realtors’ Association numbers show the inventory of unsold homes on the market grew to nearly four million in July. That’s a 12.5 month supply at the current sales pace, the highest level in more than a decade and compares poorly with the healthy level of about six months.

And that number could go up as a whole new wave of shaky mortgages that were issued just before the 2008 bust inch toward the three-year mark at which they’ll convert to payment levels their owners can’t afford. When that happens, a new wave of foreclosures can be expected to follow — the economic equivalent of the other shoe dropping.

If a second wave does lead the economy to fully falter and trigger a double-dip recession, some of the blame will lie with policymakers. Instead of marking the properties to market and commensurately adjusting mortgages — a strategy that would have avoided foreclosures and kept a majority of properties occupied — governments opted to run the printing presses and distribute funds through other channels.

Like it or not, this tactic has led to a glut of unsold housing stock that, in the midst of a jobless recovery that’s holding the unemployment rate close to 10%, will take years to dry up. For the larger economy, that’s a problem because the unsold stock will continue to hamper housing’s deep economic reach.