There’s that word again — unexpectedly. The Washington Post reports on an economic indicator that went negative at the conclusion of a big government subsidy, something that a first-year econ student could have foreseen. But as always, because of the so-called “recovery,”, it’s “unexpected”:
New home construction took an unexpected tumble last month, reflecting the bumpy nature of a tentative housing recovery.
Housing starts fell 10.6 percent to a seasonally adjusted annual rate of 529,000 in October, according to Commerce Department data. Analysts were expecting an increase. Housing starts were down 30.7 percent compared with the same period a year ago.
The decline probably reflects that nervous builders scaled back amid uncertainty about whether the first-time home-buyer tax credit that had buoyed sales most of the year would expire as scheduled this month, analysts said. Earlier this month, Congress extended the $8,000 tax credit and expanded it to some repeat buyers.
The problem is as easy to diagnose as the poor sales figures after Cash for Clunkers and is essentially the same issue. The tax subsidy for new home purchases pushed taxpayers into buying homes now rather than over the next few months or year. That artificially inflated demand while stealing sales from subsequent quarters, as well as encouraging only those who could afford the houses in the first place into the market. Once the subsidy disappeared, so did the increased demand.
In fact, the effort did succeed in raising one economic indicator — inflation. And so did Cash for Clunkers:
Excluding energy and food prices, core inflation rose 0.2 percent. That was also more than analysts had expected.
The figures were also affected by a rise in used and new automobile prices. After the expiration of the government’s Cash for Clunkers program this year, there was little inventory of 2009 vehicles left, leading to a faster changeover to the 2010 model year, Brian Bethune, a financial economist for IHS Global Insight, said in a research note. The government program also “led to the forced junking of nearly 700,000 used vehicles, and a dearth of used vehicles available for sale in the fall,” he said.
The inflation in the used-car market was also an entirely foreseeable consequence of the destruction of assets by the government. Instead of real growth, we have inflation.
Congress has passed an extension of the subsidy for new housing purchases. Will that bring actual prosperity? Not really, although it’s not nearly as bad an intervention as the supercharged CRA and the Fannie/Freddie mandate to buy subprime loans were in 1998-2007. But without an actual recovery — which this makes clear we have not yet seen — it will be nearly meaningless. If the housing industry can’t generate sales without government subsidies, then we haven’t had real economic growth at all.
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