Mortgage growth probably needs to get back above 5% to really gather enough demand to push homebuilding back to normal ranges. I recently posted a graph about housing starts. Here is a graph of private fixed investment. It tells a similar story. As of the end of 2003, private investment in structures, as a portion of GDP, was moving along within historical ranges. Then, there was a brief jump slightly above historical ranges, followed by a decade long depression where investment in structures has been below all post WW II recessionary contractions. A decade. As with housing starts, this suggests that building could grow quickly until it is back to 2005 levels, and would need to continue at that level until after 2020 just to make up for the lost decade. If we will allow it, homebuilder revenues should eventually run at double today's revenues for some time.
In this graph, we can also see the tremendous drop in multi-family structural investments. In the 1960s, this ran at about 1% of GDP. Now, at what many consider to be an expansionary point in the cycle, multi-family structural investments are not even 0.3% of GDP. Most of those cranes that are populating American cities are building commercial space, because nobody ever protested a developer's public meeting in order to demand below market rents for corporate offices and chain stores.
The treasury side of the position is still questionable. If the Fed continues to be hawkish, it may be a long time before bonds have a 2%+ inflation premium. Real rates should climb as housing expands. But, if we don't let housing expand, then the divergence between returns to housing and real treasury returns will remain. Over the long term, the only real way to enforce this divergence as home equity builds is to induce a recession. Allowing housing to recover might solve most of our supposed stagnation problems. If we don't allow it, income based residential investment trusts could provide excess returns for some time, while the rest of us muddle along wondering what is wrong with the American economy.
Right now, we could really benefit from more money, more houses, more bankers, more immigrants, and a higher trade deficit (by which I mean more capital inflows). You know, just like all the presidential candidates have been saying....
"Because the infrastructure and housing stock is not expanding with population growth, people are either getting forced out or are going to areas that have fewer job opportunities and weaker social mobility. UC Berkeley economist Enrico Moretti and Chang-Tai Hsieh calculated in a paper last year that if the country’s most economically productive regions like Silicon Valley, New York and Boston had a more elastic housing supply, the aggregate output of the U.S. economy since 1964 would be 13.5 percent larger. That is the equivalent of $2 trillion per year, or $10,000 per American."
ReplyDeleteWho knows if the above is true, or even half true. It is interesting.
Yeah. Interesting paper. I've referenced it several times in recent posts. It seems like their numbers may depend on some assumptions about potential population movements that are unrealistic. But, I'm not sure. Over decades, many things can happen that would have seemed unrealistic. A lot of interesting things in that paper. For instance, if I remember right, they say that plentiful housing in places like Houston and Phoenix may actually hurt real aggregate production, because people move there and take less productive work because of the lower cost of living.
DeleteI really like their way of conceiving of the limited housing stock as a limit on labor available for work in those cities.
"I really like their way of conceiving of the limited housing stock as a limit on labor available for work in those cities."
ReplyDeleteWhen City Council meetings in my town (near Seattle) coincide with lunch hour, I give self-important, alarmist speeches about how diversion of human capital from our area's IT, aerospace and biotech firms threaten civilization and humanity. Sometimes I list some great thinkers and leaders killed by cancer, recount successes of the Eurofighter Typhoon against the F22, and claim that Amazon's advances in drone delivery will lead to ambulances that can fly over snarled urban traffic in Bangkok and smuggle antibiotics over militia checkpoints on Central African roads. Assembling smartypantses seems very important
I don't see these rules as adjustable. Hundreds of people turn out, from miles around, to every community review hearing about modest apartment buildings in my neighborhood. The affluent see their market power threatened, and "activists" complain about the affluence of new residents, even where the developers rehabilitated a superfund site