Friday, October 30, 2009

3rd Quarter GDP and Land Development...

Much has been made about the 3.5% 3rd quarter GDP number released this week and how it seems to suggest an end to this deep recession. As Lee Corso would say though, "Not so fast, my friend!"

Indeed, the Calculated Risk blog explains why, if you dig into that number, the results are not as encouraging.

This is primarily because one statistic that historically indicates the ending of a recession--new homes sales--remains quite underwhelming even with the recent positive GDP increase.  Combine that with a very low number for new home starts and it's pretty clear that land use and development is not going to play a significant role in ending any recession right now.

The current reported inventory of available homes is so high that it makes little sense to start a great deal of new ones.  The word "reported" is important because it is very likely that banks still hold a large number of available homes on their balance sheet but have yet to make them available for sale for a variety of reasons.

The result?  As Calculated Risk suggests--a circular problem:

Unfortunately ... the two leading sectors, residential investment (RI) and personal consumption expenditures (PCE), will both be under pressure for some time. The Census Bureau report this morning showed that there are still far too many excess housing units (homes and rental units) available. There cannot be a sustained recovery in RI without a boom in new home sales and housing starts, and it is difficult to imagine a boom in new home sales with the large overhang of housing units.

It takes household formation to reduce the excess inventory, and household formation requires job creation so that individuals and families will feel more confident and move out of their parent's basements. Some day there will be a boom in household formation, once job creation returns, but usually the first jobs in a recovery are from RI and PCE - so the economy is in sort of a circular trap.

Chad Emerson, Faulkner U.

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