by Calculated Risk on 8/24/2005 11:25:00 PM

Dr. Duy adds some interesting thoughts today: Another Look at Housing.

Like many others, Dr. Setser, Gen'l Glut, Paul Volcker to name a few, Dr. Duy expresses some concerns:

I was unsettled by the combination of weak durable goods numbers, strong housing numbers, and this morning’s Wall Street Journal piece regarding global capital flows into the US housing market. Like many, I see the need for an eventual rebalancing – a shifting away from consumption and housing and toward investment – of growth in the years ahead.

Dr. Duy than adds some excellent analysis and graphs. I believe the graph showing the relationship between the CA (Current Account, mostly trade deficit) and housing starts is very interesting. Dr. Duy concludes:

All in all, it suggests to me that international factors – specifically, the willingness of foreign investors to place their capital into the US – have a significant place in explaining the consumption binge/CA deficit/low interest rate issue.
...
Of course, the international angle only increases the difficulty of the Fed’s job – the willingness of foreign capital to flow into the US could mean the Fed will end up strangling the non-housing sectors of the economy to keep overall inflation expectations in line.

The entire post is well worth reading.

And on today's numbers, I plotted the New Home Sales for July for the last 30 years (annual rate, seasonally adjusted).


Click on graph for larger image.

The vertical lines indicate the start of a recession.

With the increasing Existing Homes inventory and this very strong New Home Sales report for July, more and more I think this looks like a blow off top for housing. I probably could have written that last year too, but I didn't see the widespread speculation (especially speculation with riskier financing).

I believe there is a relationship between housing, trade and interest rates, and when that starts to unwind, we may see a vicious cycle on the downside.