Major changes are underway in Western housing markets. They are generational in nature, meaning that we are starting to see a New Normal develop in terms of future demand patterns for chemicals and polymers.
The past 30 years have seen Western leaders committed to the concept of a ‘property-owning democracy’. Both US President Reagan and UK Prime Minister Thatcher believed that giving people ownership of their home would help stabilise politics, after the traumas of the 1960-70s.
In the US, Reagan decided to use the government-owned Fannie Mae and Freddie Mac agencies as the main vehicle for this expansion of home ownership. In 1981, Fannie Mae was allowed to issue its first mortgage backed security, building on a successful earlier experiment with Freddie Mac.
This provided government insurance for private mortgages, as long as they confirmed to certain standards. Essentially this reduced the risk of home lending, and meant interest rates on mortgages were reduced, to reflect the benefit of the government’s guarantee.
Future Presidents, including George HW Bush in 1992 and Bill Clinton in 1999, then widened eligibility to encourage low and moderate income borrowers. But then, during the 2003-8 period, the introduction of ‘sub-prime loans’ allowed people with very low incomes to access cut-rate mortgages.
The result was disaster. Credit standards collapsed, as the economy headed towards its Minsky Moment. And as the blog forecast in its September 2007 “every mania is based on an illusion” letter to the Financial Times, the government was eventually forced to step in as the ‘buyer of last resort’, to stabilise the position.
Both Fannie and Freddie were taken over by the US government in September 2008. Their losses to date now stand at $150bn, with a lot more probably to come. Since then, as the chart from the Wall Street Journal shows, private lenders have virtually disappeared from the mortgage market.
92% of all new US mortgage loans now rely on government support. Equally worrying is that Fannie is now the world’s largest bank by assets, and Freddie is in the top 10. Winding them down, as suggested in the White Paper, is going to be very costly indeed. China, for example, is owed $450bn.
In addition, the White Paper aims to “dramatically transform the role of government“. Treasury Secretary Geithner wants home owners “to put more equity into their home“. This, of course, will reduce home ownership by reducing mortgage eligibility and increasing costs for buyers.
The aim in the future will be “affordable housing“, whether via renting or owning. This is clear enough evidence that a generational change in direction is now taking place. We will not see housing starts back at 2003-7 levels for decades, if at all.
Equally, the era of people buying the largest home they could, with the highest possible leverage, is also now behind us. It was driven by the idea it could lead to risk-free capital gains. But with 27% of US homeowners now underwater on their mortgage, this myth is also dying.
US housing was a $35bn market for chemical and polymer sales at its 2003-7 peak, with each home worth $16k of sales. Today, with house starts ~600k, it is worth just $10bn. Companies will therefore need to look to new areas for growth, if they wish to succeed in the New Normal.