We saw some funny and half-mocking tweets in response to this op-ed by Roger Altman, mostly because “A housing boom will lift the US economy” sounds like a headline that was found inside a time capsule packed a decade ago, maybe one you’re not supposed to open because it houses evil spirits, like the Dybbuk box in the new Sam Raimi flick.
Whatever, given our own ruminations on the topic (see the related links below), we think Altman deserves to be taken seriously. He gets right to the point:
There is no sector of America’s economy that is more cyclical than housing. If it is pushed down far enough and long enough, as it was in the post-2008 housing depression, it will eventually snap back to levels that exceed historical norms. That turn in the market is occurring now and it should become a boom by 2015. It will be powerful enough, together with rising oil and gas production and other factors, to lift = the entire US economy. Indeed, the resultant US economic growth rate may be higher than the Federal Reserve’s long-term forecast of 2-2.5 per cent.
And as to the causes:
This surge will be driven by a combination of improving house prices, a lower inventory of homes for sale, rising rates of household formation and population growth, and improving access to mortgage credit.
Obviously getting the timing right is difficult, and Altman leaves himself plenty of wiggle room by pegging it “by 2015″. But the overall thinking here is actually quite convincing.
We think the household formation rebound will be the most powerful influence, while we’re more worried than he is about the problem of access to mortgage credit. This remains half a mystery and is fodder for a much longer discussion.
But rather than rehash our earlier arguments, we’d note a few things that are either commonly misunderstood or often go unmentioned in discussions of the housing market.
– One is that, as Matt Yglesias writes today and Karl Smith earlier, the housing boom of the 2000s wasn’t nearly as big as many people think. Or rather it’s more accurate to say that there was a tremendous mortgage credit and home price bubble, but not a huge housing construction boom.
It’s true that there was a lot of inefficient building and now there are houses in distant suburbs where nobody wants to live, but inefficient building is different from over-building. Meanwhile the decline in housing construction that started just before the financial crisis actually was precipitous on a historical scale. Combined with the growing population and household formation trends of the last half-decade or so, it makes sense to think that much more housing will be needed soon, even if the economy only continues rebounding only at sluggish pace.
– We come back to this chart one more time…
This shows construction employment since 1970, and you can see a clear cyclical pattern. As we noted before it’s unlike the chart for manufacturing, an industry where employment trends are complicated by technological advancements and outsourcing. There’s little reason to think that the construction sector has experienced epic gains in underlying productivity since the last expansion ended, yet employment in the sector remains at mid-90s levels. In other words, a housing rebound is likely to spur quite a bit of construction hiring.
– There are some obvious and direct ways that a housing rebound can affect other parts of the economy — more construction jobs, the need to buy more durable goods like furniture, cars, etc… — but there is also an indirect way, which is that a healthy housing market should also give households more confidence to spend again.
The impact of housing prices on consumer spending is something that economists have only begun to study in recent years (good explanation in this NYT piece from last year), but you can get some sense of it in these charts…
… and this commentary from Barclays:
The rebound in home prices, which we expect to persist into 2013, has important implications outside the immediate housing market. Rising home prices that lead to increases in net housing wealth should reduce the incidence of negative equity and bolster consumer spending (Figures 5 and 6).
According to data from CoreLogic, about 23% of all properties with a mortgage had a loan-to-value ratio in excess of 100% in Q1 2012, about the same as a year ago. Nearly 7% of properties with a mortgage have a loan-to-value ratio of 100-109%, suggesting that a significant number of households would leave a negative equity position with a fairly modest cumulative rebound in home prices.
If our housing market outlook is accurate, real estate wealth, which has been a drag on consumer spending since late 2007, should begin to boost consumer spending in 2013. This would mark an important turning point for household balance sheets, where net wealth effects from falling financial prices and the collapse of the housing market have been significant impediments to the strength of consumer spending and, in turn, the pace of the broader recovery.
– As to the issue of access to mortgage credit, we wonder (but don’t yet know) how much of it comes down to the following issue, as explained by CreditSights analysts after a recent conference:
At our recent panel on mortgage risks, there was agreement that the housing market is now showing fundamental improvement compared to the past several years. However, housing markets are still being held back by uncertainty related to the future of the GSEs/housing finance, the securitization markets, and the definition of QRM standards.
Much of the discussion on the panel centered on the future of the GSEs, and what public or private sector entities might eventually replace them. There appeared to be agreement that the private sector would eventually have more of a role than it currently does, and that while the government would retain some role, it would be substantially smaller. As well, the issue of mortgage repurchases must be resolved for banks to gain more appetite for conforming originations.
The path to restarting private label securitizations seems to hinge on the definition of Qualified Mortgages, and technical issues about the legal protections for banks if they originate these mortgages.
It will take a while yet for the GSEs to phase out, of course, and we genuinely don’t know how much a restart in private securitisations is needed to boost access. Meanwhile, QE3 should help on the margins by targeting MBS and committing to lower rates, but there remain significant supply-side obstacles for the banks to ramp up origination capacity.
Related links:
Still waiting on looser lending standards (for mortgages) – FT Alphaville
When household formation growth returns – FT Alphaville
Demographics and destiny, US housing edition – FT Alphaville
The decline of US housing inventory – FT Alphaville
Past as predictor for construction and manufacturing employment - FT Alphaville
A housing boom will lift the US economy - Roger Altman in the FT
Breaking down five million job losses – FT Alphaville
Copyright The Financial Times Limited . All rights reserved. Please don't copy articles from FT.com and redistribute by email or post to the web.