The best stimulus package for the economy is time — period. The business cycle has to run its course and wipe out the bad business practices of the past. Unfortunately for most people, what began as a confidence crisis on Wall Street turned into the dried-up credit market virtually killing the rest of the economy. And what industry needs credit the most? The housing market. The only fix for the Wall Street induced recession is for the housing market to stabilize itself and this is going to take time.
Former Fed Chairman Greenspan alluded to this at a recent speech at the Economic Club of New York. Without a healthy housing market, the economy is dead in the water. And, with a lot of excess supply around, housing starts are going to take a hit.
Not surprisingly, recent data from the Commerce Department revealed that construction of new homes and apartments in January dropped almost 17% to a seasonally adjusted annual rate of 466,000 units. This was the slowest pace for housing starts in more than half a century of data collection.
Recent data showed that construction activity dropped 43% in the Northeast, 30% in the Midwest, 13% in the South and just over 6.0% in the West. One of the indicators of future construction activity, applications for building permits, dropped to a record low in January. The number dropped almost 5.0% to an annualized rate of 521,000 units.
As I’ve said, the situation will fix itself, but it’s going to take a lot of time. Eventually, the foreclosures will slow and demand will gradually eat away at the excess supply in the system. One big worry I have about a recovery in real estate is the fundamental backdrop currently being created that has the potential to generate enormous inflation down the road. If the rate of inflation gets out of control, the only way to fight it will be for the Fed to raise interest rates, killing off the very housing demand they are currently trying to save.
The very stimulus offered by the central bank and government (reduced interest rates and massive amounts of spending with borrowed money) has the potential to create the unintended consequence of prolonged economic malaise. In a free market economy, massive stimulus will likely create minimal recovery and massive inflation, which will in turn create minimal recovery. I’m really worried of the potential for a vicious cycle of economic mediocrity over the next decade.
There’s no doubt in my mind that the housing market is the major industry that needs to right itself before the rest of the economy can do so. Time, reasonable business practices, and a good dose of common sense will eventually turn the ship around. All three are required for the situation to work.