Why Would an Economist Expect Home Sales to Rise From Current Levels?

Economists seem to specialize in saying silly things about the economy. In a NYT article that discussed the prospect of consumers leading a recovery, Nigel Gault, chief domestic economist at IHS Global Insight, is cited as saying that it would take a jump in employment to bring about a rebound in house sales.

It is difficult to understand why any economist would expect sales to move substantially above current levels. Existing home sales have been around 4.6 million in recent months. By comparison, in the relatively healthy pre-bubble economy of the mid 90s existing home sales averaged a bit more than 3.5 million. This means that sales are already close to 30 percent above their pre-bubble level even though population has only increased by around 10 percent over this period. It is hard to imagine why any economist would expect sales to be so much higher now than in the pre-bubble period.

It's also worth noting that savings rate remains far below its long-term average which means that consumer spending is high relative to their disposable income. It is not clear why economists would expect consumer spending to go still higher, which would imply a lower savings rate.

This seems especially unlikely since the huge baby boom cohort is approaching retirement with very little savings. We might expect to see baby boomers saving a higher than normal share of their income in their remaining years in the workforce.

Higher Savings Rate?
written by James, June 10, 2012 7:22

Yes, we might expect savings rate increase as they approach their 'golden years." In my humble opinion, that's nice and a dream that has evaporated long ago.

You need to have a decent disposal income b4 even consider increasing the savings rate. With most with their house equity gone, 401(K) (with employers' suspsended contribution) becomes like 201(k), income to help elderly parents and unemployed college-graduated kids, paying much higher health costs themselves and yet your mandatory living expense could only be trimmed down so far....

Many aging baby boomers already conceded they will work well into their 60's...

...
written by urban legend, June 10, 2012 11:32

If consumers are spending at a high rate, and consumer spending is 70% of the economy, then how is aggregate demand down? I don't get the mechanism there.

Buying a house is savings, not consumption
written by Melissa, June 11, 2012 5:41

I don't understand why you would equate buying a home with consumption. Most middle class people are told that buying (as opposed to renting) a home is a way of saving, because of the equity they accrue. In fact, the argument against expecting more home sales is supported by the low savings rate because most people need to build substantial savings in order to have a down payment. Or is that an archaic notion nowadays?

About that increase in housing sales....
written by EMichael, June 11, 2012 5:43

Last I looked, over 40% of houses sold in the last quarter were cash deals.

While they help, investors buying rental properties is not a very postive sign. Eventually, the investors will stop buying properties and sales will plummet again.

...
written by skeptonomist, June 11, 2012 9:26

Why base this on existing homes only? Sales of new homes is very different:

http://www.census.gov/construction/nrs/historical_data/

The current rate is about half the long-term average or what it was in mid-90's. Construction jobs come from new homes, not existing ones.

I should have counted new home sales
written by Dean, June 11, 2012 1:58

Skeptonomist is right. I should have added in new home sales. However, the number of existing home sales is about 5 times the size of new homes sales, so it really will not change the picture.

We were selling around 670,000 homes a year in the mid-90s before the bubble. If knock this up by 10 percent for population growth, that gets us to 750k. This is about 400k more than we are selling now. That means that combined new and existing home sales are still above pre-bubble levels -- even after adjusting for population growth. So, what's the problem?

Urban legend,

demand is down because consumption was even higher at the peak of the bubble.

Why Would an Economist Expect Home Sales to Rise From Current Levels?

About Beat the Press