I have read several articles as of late suggesting that the housing recovery is likely to regain its footing in 2014 supporting further economic growth. Gene Epstein penned the following for Barron’s:
“Snow paralyzed the Eastern U.S. last week, but it won’t put a chill on what could be the hottest economy since the late 1990s. That’s the contrarian outlook of Applied Global Macro Research, an unusually rigorous and prescient group that expects 4% growth in economic output this year and next. The firm’s three economists — Jason Benderly of Vail, Colo., and Carsten Valgreen and Niels-Henrik Bjørn of Copenhagen — cite the ongoing housing recovery for their bullish outlook, arguing that future demand for housing is understated.”
The core premise is that there is a large amount of pent-up demand for housing that will continue to boost economic growth for quite some time into the future. While this may indeed be the case in theory, it is based upon assumptions that “past is prologue”. However, given the current economic dynamics of stagnant wage growth, the structural employment shift and tighter lending standards it is unlikely that the consumer will be able to relever their balance sheet as in the past. The chart below shows new home sales as compared to household debt as a percent of disposable income.
As I have discussed previously in “What Has Been Forgotten:”
“There is no argument that housing has improved from the depths of the housing crash in 2010. However, while the housing market remains at very recessionary levels, recent analysis assumes that this has been a natural, and organic, recovery. Nothing could be further from the truth as analysts have somehow forgotten the trillions of dollars, and regulatory support, infused to generate that recovery.
I recently penned an article showing the $30 trillion, and counting, that has been thrown at the economy, and financial system, to keep it afloat over the last 4 years. Of that, trillions of dollars have been directly focused at the housing markets including HAMP, HARP, mortgage write downs, delayed foreclosures, government backed settlements of “fraud closure” issues, debt forgiveness and direct buying of mortgage bonds by the Fed to drive refinancing and purchase rates lower. Of course, the Fed has also maintained its ZIRP (zero interest rate policy) during this same period with a pledge to keep it there until at least 2015.
The point here is that while the housing market has recovered – the media should really be asking ‘Is that all the recovery there is?’ More importantly, why are economists, and analysts, not asking the question of ‘What happens to the housing market when the various support programs end?’ With 30-year mortgage rates still near 4% we should be in the middle of the next housing bubble – not crawling along a bottoming process.”
The chart below is the Total Housing Activity Index which is an index of all economically important housing activities from new and existing home sales, to permits and starts.
(For more extensive analysis of the current housing market recovery read “An Update On The Housing Recovery”)
The optimism over the housing recovery has gotten well ahead of the underlying fundamentals. While the belief is that the current push in housing is a side-effect of a recovering economy, the reality may be a function of the speculative rush into buying rental properties for cash which created a temporary, and artificial, inventory suppression.
If we take a look at actual loan demand, we find a much different picture of the real estate market. The following two charts show that demand for loans have peaked and are now on the decline. This leaves the hopes of an economic recovery based on housing somewhat at risk.
The rising risk to the housing recovery story lies in the Fed’s ability to continue to keep interest rates suppressed. It is important to remember that individuals “buy payments” rather than houses. With each tick higher in mortgage rates so goes the monthly mortgage payment. With wages remaining suppressed, 1 out of 3 Americans no longer counted as part of the work force, or drawing on a Federal subsidy, the pool of potential buyers remains constrained.
While there are many hopes pinned on the housing recovery as a “driver” of economic growth in 2014, the data suggests otherwise. The real driver of an economic recovery is full time employment that leads to rising wages and savings. Unfortunately, this is something that eludes the current Administration that is focused on creating new regulations on the average of every 8 minutes, raising the cost of healthcare and increasing taxes.
Call me crazy, but maybe its time to try something different.