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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

November 23, 2009 at 10:10 AM

No, Virginia, there’s no Santa Claus to return housing to 2005

Top of the News: Today’s report that existing house sales rose 10.1 percent in October, while better than a similar-sized decline, is hardly a sign that happy days are here again. It is mostly an artificial jump based on a government tax credit for first-time buyers and the expectation it would end with the month.

Note that the median price fell 7.1 percent compared to the hardly healthy numbers of last October. This ripples out to affect the net worth of house sellers, many desperate to unload the biggest asset they will ever own, many owing more on it than they borrowed. The ripples extend into local economies, particularly in the hardest hit regions of Florida, the Southwest and Michigan.

Inventories shrank at a tepid rate, leaving nearly 3.6 million previously owned houses on the market. Some 30 percent of the sales were distressed, which includes foreclosures. And patient investors, including foreigners using the dollar carry trade, could take advantage of extremely low interest rates. (Meanwhile, every tax credit adds to the deficit).

Last week’s report that new house construction fell to its lowest pace in six months is more reality. What’s amazing is that so many experts continue to be surprised. We’re not going back to the old model of massive sprawl housing built and purchased on unsustainable debt, with double-digit price increases every year, as the major American economic activity. The “new normal” has yet to be established.

The Back Story: Societe Generale economist Albert Edwards is a bear, to be sure, but he’s not alone in worrying about what happens when the cheap-dollar carry-trade bubble bursts on Wall Street.

According to’s Alphaville, he predicts major disruptions in the financial markets over the next 18 months, particularly if the carry trade unwinds suddenly, sending the dollar soaring. Adding to the trouble: the weak U.S. economy — with continuing unemployment, sick banks, state fiscal crises and no fresh stimulus — returns to recession and the Chinese economy turns into a bubble (if it already hasn’t) that pops.

“Any synchronized end in Chinese and U.S. recovery will undoubtedly heighten geo-political tensions and accelerate the inevitable trend towards protectionism,” he worries. “The trend towards competitive devaluation will also increase. And in the case of China, if its economy founders unexpectedly and unemployment soars, no lever to restore growth should be ruled out, including devaluation.”

Today’s Econ Haku:

Take your CDs, go.

A low-profit pain compared

to derivatives

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