One of our best signs of economic hope is the slow revival of the housing market. However, recent figures are starting to cast doubt on the sustainability of that recovery. New home sales have begun to lag.
New homes sales fell 14% in July and existing home sales are also weak. The sad news is that these trends are neither surprising nor are they likely to change soon, though the underlining trend is strengthening.
Delays associated with the government shut down and the slight uptick in employment are nothing to shout about.
ECB President Draghi is examining the second big turning point in the euro saga: The inspection of the balance sheets of the 100 plus largest European banks in which he hopes to find weakness and impose a common standard for loan quality. Eurozone politicians are reluctant to look too deeply, but the ECB must. The Eurozone bust came from mortgage debt in Ireland and in Spain. The Eurozone has made little progress in reducing this private sector debt burden. Repairs have been hindered by fiscal austerity which actually deepened the recession. Weak banks were reluctant to recognize and make provisions for non-performing loans. European bankruptcy laws are less user friendly than in the US. Europeans remain liable for unpaid mortgage debt. Corporate bankruptcy procedures are ponderous and for example, household debt in Ireland and in Holland exceeds 100% of GDP.
This burden of private debt must be lightened. It is the biggest drag on European growth. The draconian austerity must be ramped back. Banks must recognize and write down non-performing loans. An honest assessment of bank’s balance should result in a willingness to sell or restructure mortgages and corporate debts. Sorting all this out will take time, but dealing with this trap should be a priority. Zombie businesses and broke households will never prosper.