Tuesday, September 21, 2010

Recovery on the way?

Forbes columnist Joel Kotkin has found some pretty convincing evidence that housing recovery is America’s future. Look at the chart below, drawn from Kotkin’s article:
Housing is so much more affordable now that once the jobs return, an upsurge in home sales is sure to follow.

Kotkin, who from his Orange County California perch is more attuned to suburban and immigrant trends than many, also believes that whatever planners say, the people want single family homes such as those found in Los Angeles, Riverside, and Las Vegas. Kotkin writes:
Already a majority of immigrants live in suburbia, up from 40% in the 1970s. They are attracted in many cases by both jobs and the opportunity to buy a single-family home. For an immigrant from Mumbai, Hong Kong or Mexico City, the “American dream” is rarely living in high density surrounded by concrete; if they wanted that, they could have stayed home.

Of course, it’s all about when that recovery will occur. Washington Post columnist Robert Samuelson has a view on why consumer spending is returning so slowly. (Samuelson seems to believe the relationship between jobs and consumer spending is cart-horse, not chicken-egg; in other words, consumers first spend, then consumer spending creates jobs.) The reason spending lags, Samuelson asserts, is that consumers spent down their wealth too far, and now must save to recover. In 2006, their savings rate had dropped to 2%. They were over-extended, too far in debt. Now they are recovering, back up to 6% savings.

That could be great news, if their savings target is 6%, and consumers have now reached that target. Savings stashed away, consumers can then begin spending in earnest again. And debt reduction works the same way—first reduce debt, then resume spending. The good news here, Samuelson says, is that household debt has already dropped $800 billion from its peak of $11.7 trillion, while debt service — the share of income going to interest and principal payment — has decreased from almost 14% in early 2008 to 12.5%, its lowest level since 2000.

Good news, for sure. But what if people want to save even more, or reduce their debt payments even further, before resuming spending?

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