Overshoot

When people try too hard to hit a target, they often overshoot.

We saw that last week in the disappointing World Cup game against Ghana, when the US shot again and again and again without success. We’re seeing that now in the housing economy. The government wanted to stimulate the housing sector and adopted a home-buyer tax credit. Only they overshot. As the tax-credit was due to expire, more and more people rushed in to take advantage of the program, and the market seemed buoyant.

Now that the program has ended, the housing market looks like a new phase in the Great Recession. Housing sales fell to their lowest levels in 30 years. But that’s just overshoot. Housing wasn’t so hot in the spring, and it’s not so not now. The housing sector is recovering like the rest of the economy, but the stimulus program borrowed some action from the future.

The housing sector is a leading indicator of the economy because it measures what consumers are willing to do with their money. It also anticipates other consumer activities, because after people buy a new home, they often need to update the kitchen or change the carpeting. But when short-term incentives change, then the statistic is less helpful, because demand has been artificially altered.

Housing, like the rest of the economy, is recovering slowly. Artificial measures aside, this will continue for some time.

Douglas R. Tengdin, CFA
Chief Investment Officer
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