Smith Faculty Opinion Article

Peter Morici By Dr. Peter Morici, Professor of International Business
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April 21, 2009

Housing Sales and Fixing the Economy

It seems an article of faith that the first signs of recovery will emerge in the housing market. March data for existing and new homes sales, due out Thursday and Friday, will be trumpeted crocuses of spring if those beat expectations.

Banks report new mortgages are up. If those are more than homeowners refinancing at lower rates, then existing homes sales should dart up from the tepid 4.72 million annual pace recorded in February. The consensus forecast is 4.65 million, and my electronic Ouija board spits out 4.74 million. Something above 5 million would be cause for jubilation.

Buyer traffic on new home lots was weak in March but economists, including this one, are forecasting sales steady at about 340 thousand. Something above 360 thousand would instigate new optimism.

Even with upside surprises, remain cautious.

Supplies of unsold new homes exceed a full year’s supply, housing starts continue to languish, and a burst of new construction is months away.

During the bubble, easy credit made homes and autos artificially inexpensive, and Americans are overstocked on bedrooms and wheels. It will take some time for population growth to create demand for significantly more dwellings and vehicles.

Habits are radically changing. Americans are dinning at home more, spending less on entertainment, and setting limits when they visit supermarkets and malls.

Horror of horrors, those that still have jobs are putting more into retirement and savings accounts.

If Americans are no longer recklessly spending more than they earn, then the Obama Administration will have find other ways to fire up demand for American-made goods and services.

During the bubble, the trade deficit rocketed to more than $700 billion or 5.1 percent of GDP. That was almost all oil to fuel autos and imports from China that exceeded exports by nearly five to one.

To achieve sustainable growth, Americans need to drive more fuel efficient vehicles, and buy less from, or sell more to, China.

Obama’s programs to create green jobs will use domestic coal and gas more efficiently to generate electricity and manufacture products, but those won’t solve the auto MPG problem anytime soon.

We have technologies to produce much more fuel efficient vehicles. However, with autos lasting more than 15 years, quickly changing the fleet requires incentives—a clunker subsidy to put recent-vintage, low-MPG vehicles into the crusher. Replace those Tahoes with crossovers.

Similarly, no sensible person wants blind protectionism, but Obama like Bush is reluctant to challenge China’s economic development strategy of undervaluing its currency, subsidizing exports and blocking imports of competitive American products. Now, China is exporting the worst effects of the recession, and maintaining six percent growth, by upping its export incentives.

It’s high time for a recalibration of trade policy to ensure trans-Pacific commerce is based on comparative advantage, not Chinese foreign policy ambitions.

Those harm the U.S. economy and make it more difficult for U.S. diplomats to offer democracy and markets to a world increasingly skeptical of American values.

Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.