Summary: Here’s another status report on the US economy.. Most economists expect faster growth. Perhaps so, but there are dark spots in the picture. Concerns about unsustainable auto sales, weakening exports, and (the big one) the mini-housing boom rolling over.
Expectations run high for the US economy, an acceleration from the 2%/year GDP growth we’ve had since the crash. Surveys record optimism among purchasing managers, builders, and consumers. Manufacturing remains strong, with hints of the long-awaited capital expenditures boom.
There are several engines driving the slow growth of US economy. Large among them are automobile sales, housing (both new and existing home sales), and exports. Export growth might fade as the US dollar rises (decreasing competitiveness of US goods) and the Japanese and European economies slow. Automobile sales are driven by mad long-maturity loans to sub-prime borrowers — a boom almost certain to end badly.
Now perhaps its the turn of housing. Top real estate analyst Mark Hanson has been warning since late last year that the housing markets were rolling over — as described in this post, and at his website. Now a second voice speaks up.
Joshua Pollard was Goldman’s lead US housing analyst from February 2009 to March 2013. He’s written a forecast for the US housing market in the form of a letter to the President. It can be downloaded from his website. He has some disturbing conclusions. It’s deeper and more complex analysis than Hanson’s, but comes to similar conclusions.
House prices are 12% overvalued today. They have already started to decline. Today’s misvaluation matches the excess of 2006-07, just before the Great Recession. Since World War II home prices have been tightly correlated to income and mortgage rates (R2 = 96%). Investors/cash purchasers, which make up 50% of home sales, have driven real estate volatility to unrivaled levels in trackable history. As public policy makers debate seminal decisions on “forward guidance” and unconventional monetary stimulus we note that each 1% increase in rates drops home valuations by another 4%; at a 2% fed funds rate, where fed officials and investors expect to be by the end of 2016, the overvaluation equals 20%.
Respectfully, the United States cannot afford another housing driven recession. The facts and correlations – the tenets of probabilities – suggest it is more likely than not that home prices fall 15% in the next three years.
It’s a complex analysis. A top-down view, unlike Hanson’s ground-level perspective. It’s worth reading in full. If Hanson and Pollard are correct, then America might start a downturn from a position of weakness unique since WW2. Now for the bad news…
More bad news
After five years of slow growth, most economist expect accelerated growth. As they do each year, only to see their hopes dashed. Perhaps there is are structural forces at work.
In January 2011 the Federal Research estimated the long-term growth rate of the US economy at 2.5 – 2.8%. This week the Fed’s estimate had fallen to 2.0 – 2.3% — barely above the 2% “stall speed”. Also their forecasts for 2014 – 2016 have steadily dropped. Years of low investment by the private and public sector (see links below), a decaying education system, rising debt levels, and demographic headwinds (an aging society) — all these things reduce America’s ability to grow.
For More Information
Other posts about real estate:
- Diagnosing the eagle, chapter I — the housing bust, 6 December 2007
- “Idiots Fiddle While Rome Burns” – comforting and facile rhetoric, 24 July 2008
- A vital but widely misunderstood aspect of our financial crisis, 18 September 2008 — Too many homes.
- Knocking down houses in order to save the village, 20 October 2008
- Destroying houses in order to boost home prices, 16 December 2008
- The housing crisis allows America to look in the mirror. What do we see?, 9 March 2009
- Another step to solving the housing crisis: downsize cities by destroying neighborhoods, 2 April 2009
- Cutting through the fog to clearly understand the housing crisis, 8 July 2010
- Housing Update – dynamite to blast us out of our lethargy?, 27 July 2010
- Deflating the housing bubble – an update, 30 January 2013
- Has the Fed blown another housing bubble?, 30 January 2014
- Economists forecast a boom soon. The numbers show slowing. Who is right?, 21 July 2014