Tuesday, September 22, 2015

More Signs of Life in the Treasury/Homebuilder Position?

Closed-end real estate loans at commercial banks remain flat, after showing some life early in the year.  There have been a few other signs of life, though.

Friday, the Fed published the Financial Accounts report for 2015 2Q, which is slower than the weekly and monthly bank reports, but more comprehensive.  Finally, we are seeing an increase in mortgage levels.  Maybe non-bank alternatives to housing funding are finally filling in the housing gap for owner-occupier households.  It's only 1.6% annualized growth, but at least it is strong movement in the right direction.  After a few years of mortgage growth at the top end of the 5% to 15% historical range, we have had a decade of negative mortgage growth.  And practically everyone I talk to believes that high rents and high home prices are a demand problem.  This suggests that the Great Recession created a mental virus that may infect our national psyche for years.  But, at some point, if building a reasonable number of houses doesn't cause Armageddon to arrive, maybe everyone will tip-toe back from crazy land and believe it's ok again.

The recovery of homeowners' equity has continued, after a brief rest in 2014.  I think we may have reached the tipping point where mortgage growth and equity recovery create a virtuous cycle of new activity that helps prices and building to recover more, although homeownership continued to decline sharply in 2015 2Q.  At the current pace, we will be back to pre-bust equity levels by mid-2016.

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 total, the 2004-2005 boom together with the drop below trend in private residential structural investment is responsible for a net 6% gap in GDP.  Residential recovery could add 1% to real GDP growth for 3 full years.  But, this is investment, so the investment will add persistent value.  Currently residential real estate annual gross value added is about 7% of home values.  So, if we can build that missing housing stock, real GDP will have a persistent annual boost of nearly 0.5%.

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....


  1. "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."

    Who knows if the above is true, or even half true. It is interesting.

    1. 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.

      I really like their way of conceiving of the limited housing stock as a limit on labor available for work in those cities.

  2. "I really like their way of conceiving of the limited housing stock as a limit on labor available for work in those cities."

    When 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