Two economic indicators over the past week indicate that the recovery may have trouble getting off the ground.  Today, the Commerce Department reported a sharp drop in sales of new homes after a few months of tepid increases fueled by a tax break.  The previous month’s figures also got revised downward by 12,000 sales, or almost 3%:

Sales of new U.S. homes unexpectedly tumbled in September, their first drop in six months, underscoring the hazards to an economic recovery that businesses appeared to be banking on.

New single-family home sales fell 3.6 percent to a 402,000 unit annual pace from a downwardly revised 417,000 units in August, the Commerce Department said on Wednesday. Analysts polled by Reuters had expected sales to rise to a 440,000 unit pace from August’s previously reported 429,000.

A separate report from the Mortgage Bankers Association on Wednesday showed demand for mortgages has fallen for the past three weeks as buyers move to the sidelines ahead of the November 30 expiration of a popular home-buyers’ tax credit.

The biggest mystery is why this result is labeled “unexpected.”  First, defaults rose last month, making the sale of new homes less attractive as foreclosures skew the market.  More importantly, though, the expiration of the tax break should have made this outcome rather predictable.  Just as with Cash for Clunkers, the tax credit did nothing but accelerate sales to people who could already afford to buy.  As pointed out yesterday, the temporary prop for housing prices only delayed the inevitable reconciliation between actual value and market value, and stole sales from the future.

Housing contractors didn’t get fooled.  As the AP reports, inventory of new homes has hit a 27-year low.  Unlike the previous government interventions, the industry did not get suckered into investing a lot of cash into new real estate and construction, foreseeing the outcome of the tax credit’s expiration date.  They have over seven months of new-housing sales on the market at this rate, which means they will still have trouble unloading and recovering their investments.

Why? Fewer people have jobs, which means they have fewer potential clients, with or without tax credits.  Mass layoffs abated only slightly from August, the Bureau of Labor Statistics reported last week:

Employers took 2,561 mass layoff actions in September that resulted in the separation of 248,006 workers, seasonally adjusted, as measured by new filings for unemployment insurance benefits during the month, the U.S. Bureau of Labor Statistics reported today. Each action involved  at least 50 persons from a single employer. …

Among the 4 census regions, the Midwest registered the highest number of initial claims in September due to mass layoffs (38,137), followed by the West (37,480) and the South (28,943). (See table 5.) Initial claims associated with mass layoffs increased over the year in 2 of the 4 regions, with the Midwest experiencing the largest increase (+11,491). In 2009, the Midwest reported its highest September level of average weekly initial claims (9,534) in program history.

In August, mass layoff events increased 24.7% over July.  The new number still represents an 18.7% increase over July.  Furthermore, these are cumulative.  Job losses have not been balanced by job creation, which means that further job losses stack on top of previous job losses, rather than replace the earlier numbers.

Large employers are still shedding jobs, which makes the new-housing sales slump entirely predictable.  Instead of tax-credit gimmicks, the government needs to find ways to get out of the way of recovery and allow the private sector to invest and grow.

Tags: unemployment