Kass: A House Divided Against Itself
Specifically, given the backdrop of higher individual tax rates, reduced government spending, a possible trend toward higher interest rates and a still-chastened single-family homebuyer (who has recently faced an unprecedented 30% drop in home prices), I do not anticipate a smooth recovery in housing over the next 12-18 months in the face of these macro and consumer headwinds.
Multifamily housing is seeing the biggest growth; the housing start numbers from last week were misleading. Skewed data in the housing recovery is hiding the true problem -- too many multifamily homes, single homes won't see much of a bump unless first-time homebuyers get higher income. The point is that a drop in mortgage rates produced meager results, and we can't expect more stimulus money from the Fed to keep the number positive. Too much inventory of multifamily households is going to have an interesting effect on rents -- lots of competition will force rent prices to stay low; investors won't see a lot of return....As Mark Hanson points out, the single-family housing market lacks durable leadership -- repeat buyers are carrying the housing market. The more important first-time homebuyers "are out of fire power" and peaked in May 2012, investor buyers peaked in June 2012, and all-cash existing sales volume turned flat in December 2012. I worry that the Fed's (non-duplicable) stimulus (ZIRP), which induced a housing recovery over the past 18 months, might have even pushed forward home activity and demand and could conceivably produce a 2013 hangover -- much like Cash for Clunkers , the Homebuyer Tax Credit (which led to outsized market strength in second half of 2009/first half of 2010) or any of the other one-time fiscal policy moves designed to take the economy out of the Great Decession of 2007-2009. Even if housing continues to recover and exhibits something more than a stimulus-related bounce, it would take a hell of a rise in construction activity to impact aggregate U.S. economic growth given construction's relatively small role in GDP. For illustration purposes, let's presume the consensus is correct and that the residential housing market will continue to exhibit strong growth. Construction represents only about 3% of GDP. Therefore a 20% increase in construction activity will only positively impact GDP by 0.6% (before the multiplier effect takes hold). This compares against a likely 1%-2% headwind from spending cuts and higher taxes (I am user a larger multiplier than most.) Bottom line: The future outlook (in both home sales activity and for home prices) is principally a function of three variables (and I hold to a less-than-optimistic view of all these factors). 1. Economic conditions: Strength in the domestic economy, wage growth and the status of the jobs market are the historic pillars of the housing market. I am less sanguine than most regarding these variables.
In other words, what this still appears to be is a stimulus-induced bounce that can only be replicated in 2013 if (1) rates drop 0.75% to 1.00% below the average 2012 rate (i.e., 2.25% to 2.50% on a 30-year mortgage); (2) rates stay the same, and foreclosures and short sales surge (comes at the expense of prices); (3) exotic loan programs not requiring income or asset verification quickly become the norm; and (4) employment and income levels surge.
-- Mark Hanson
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