In Roger Altman’s editorial in today’s Financial Times he identifies five reasons that the nascent housing boom will continue and be the main driver of a strong economic recovery within a few years:
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.
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. Together, they should push residential investment, which includes both new construction and remodellings, to annual growth of 15-20 per cent during the next five years. This alone may contribute 1-2 percentage points to annual growth in gross domestic product and up to 4m jobs over that period.
1. The [housing] cycle is [moving] upward, starting with prices. The S&P/Case-Shiller Composite 20 City Home Price index has risen 8 per cent since March. Indeed, Barclays has projected that, by 2015, nominal home prices will exceed their 2006 peak. Home affordability is also way up, as the ratio of mortgage payments to both income and rents has never been more favourable. Moreover, the relationship of home prices to household income is back to the level of 30 years ago. Rising prices and affordability, of course, lead directly to the buying and building of homes.
2. The levels of relevant supply have fallen sharply. The number of homes for sale has fallen back to its long-term average of 2m. Yes, there is a larger “shadow inventory” of homes that are in foreclosure or carry delinquent or defaulted mortgages. However, many of these are distressed, in that they have not been physically maintained. This means that the supply has become two-tiered – quality homes and distressed homes. For most buyers, only the first of these two markets is relevant and the supply there is approaching its lowest level since 1992.
3. Housing demand is going to be strong, driven by demographics. The International Monetary Fund forecasts that the US population will increase by 15m during the 2012-17 period, more than the increase of the past five years. The two groups of the population that are growing fastest are the over-55s and the so-called echo boomers, the grandchildren of the baby-boom generation. The first group has the highest rate of home ownership. The second has been renting disproportionately, and is primed to start buying. JPMorgan estimates that 6m new units of housing are needed by 2017 just to serve the bigger population.
4. There is the coming recovery in household formation. According to JPMorgan, this rate was steady at about 1.4m annually from 1958 up to 2007. But, it plunged below 500,000 for the three years following the financial crisis, as young people moved in together or lived with parents. Now it has doubled from that level and estimates of pent-up households are at an all-time high. Most expect formation rates to rise much further still, exceeding the 50-year average for a few years.
5. The availability of mortgage credit is starting to improve. Underwriting standards tightened sharply following 2008 and the proportion of home sales that are financed by new mortgages is now at a 10-year low. However, household finances have improved sharply, with debt service ratios returning to pre-crisis levels. Moreover, banks also need the income from originating mortgages. Mortgage credit availability is therefore opening up, which also boosts home sales.
For now, the stubborn economic headwinds that began in 2008 continue to suppress US growth, which crawled along at a rate of only 1.7 per cent rate for the first half of 2012. While it may take the best part of two years for these headwinds to die, the stage is being set for a strong economic recovery beyond that. And the housing boom will be its biggest driver.
He may have gotten a new memo from the boss.
First off, we don’t WANT a “housing boom” and hopefully will not get one. What we want- and need- is a measure of stabilization. The last thing you want is another spike and (inevitable) decline. Banks are still ham fisted when it comes to lending, but now that prices are stabilizing and they don’t have to worry about having a negative equity loan two years after they underwrite it, that may change. I’m still hearing anectdotal evidence of perfectly qualified buyers being turned down.
People should be careful what they ask for. Mr. Perry looks like he’s praying for another bubble.
Mark, what are you doing on this whiny, negative nancy website? These guys are going to bring you down. You were once a shining star of conservative, often optimistic economic views. Now your ciews are eing driwned out on this chicken little demagogblog…
Roger Altman, you better be eating what you pick, but after all it was Berkshire Hathaway that tipped you off right? I bet you are bringing all those domestic content jobs back from the third world, and cutting military spending, & raising the taxes back to where they were, because you know that is where all our debt is coming from, and you don’t really want to bankrupt America to roll back all of Roosevelt’s New Deal Policies, like the GOP is talking about in the back room right now do you?!
What has this guy been smoking ????
Are you serious Mark J. Perry ? Economists are usually wrong because they have no real idea what is going on! First you need people with steady good paying jobs to buy the houses…let’s see, employment is in shambles and 47 million on food stamps (up from 31-32 million when Obama started). So who has the money to buy except investors and foreigners? Don’t tell me those that lost their jobs suddenly have money! When I go to the stores I see mostly made in another country compared to mostly made in USA 12 years ago. Can anyone spell NAFTA, GATT, CAFTA? Thanks worst president Clinton! Get it into your head that we need to produce the excellent products and sell to the world not the other way around. Made in USA used to imply the best products. That is what we need to get back to!