UPDATE: I've edited the original post to fix some typos and grammatical problems.
I'm not sure that this week's news on the residential real estate front -- on new home sales (here and here) and existing home sales and prices -- did much to change anyone's mind about where the U.S.economy is headed in the immediate future. Most of the action is still in the forecasts, and those range from cautious to downright apocalyptic. I'm in the former camp, but Calculated Risk notices something that pushes things a little farther up the anxiety scale:
New Home sales were falling prior to every recession of the last 35 years, with the exception of the business investment led recession of 2001. This should raise concerns about a possible consumer led recession in the months ahead.
Here's CR's accompanying picture:
That's picture's kind of scary, but there are reasons to believe -- hope? -- that things may be different now. There is no doubt that the banking system in the 1970s, for example -- operating under the burden of all manner of problematic restrictions like Regulation Q -- was substantially less flexible that it is today. Most of those restrictions were only slowly unwinding by the time of the 1980 and 1981-82 recessions, and in fact explicit credit controls were imposed in 1980.
Invoking the same general storyline, the savings and loan crisis of the latter half of the 1980s resulted in the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) which included new regulations on evaluating real estate values and induced major changes in the loan to (regulatory) capital ratios of financial intermediaries. Although the evidence is in some dispute, in theory the new capital standards (or the expectation of those standards) could have directly restrained lending and hence economic activity in sectors heavily dependent on financial intermediaries -- sectors like residential housing.
The story I am suggesting, of course, is one in which the housing market woes of past recessions were symptoms of broader disruptions in financial markets, disruptions that directly impacted specific parts of the economy while simultaneously impeding the reallocation of resources to other productive uses. In this light, it is interesting that the one recession not associated with stress in housing markets is also the one with no obvious interactions between economic developments and financial regulations (such as inflation and Reg Q in the early 70s) or significant changes in the regulatory environment (such as capital controls in 1980, the Monetary Control Act in 1980, and FIRREA in 1989).
There is an argument that this time around the causality is likely to run from problems in the housing market to widespread distress in financial markets -- this is number 20 on Nouriel Roubini's list of reasons the U.S. is heading for a hard landing. Says Nouriel (emphasis added):
There are systemic risks in the financial system around MBS/Housing, credit derivatives, the risk of a stock market 1987-style rout and the risk of a hard landing of the US dollar.
I certainly can't prove that fear unfounded, although I have heard it suggested that exposure to the most exotic of contracts is concentrated in boutique hedge funds, and not in mainstream financial intermediaries. That is only an impression, and even if true you may not take much comfort in that fact. On the other hand, as Brad DeLong notes, the non-impact of the latest hedge fund meltdown is "reassuring."
So, for now, I still got high hopes.