Housing used to be the engine-room of the US economy. Rising prices allowed people to use their house as a cash machine. In turn, this drove GDP growth, as consumer spending is 70% of the US economy. But for the past 5 years, this process has gone into reverse:
• Owners now have $9.18tn in mortgage debt, versus $11.3tn in 2007
• 20% of all owners owe more than their property is worth
• Higher lending standards mean home ownership trends are reversing
• They also stop many owners refinancing at today’s lower interest rates
The encouraging news is that prices seem to have stopped falling, for the moment at least. As the chart shows, based on the S&P Case Shiller 10 City Index, prices in June (red square) were similar to those in 2011 (green), 2010 (blue) and 2009 (grey).
The question now is what happens next:
• A Base Case might be that prices remain at today’s levels
• An Upside Case might see them rise modestly
• A Downside Case could see them start falling again
The key factor is probably foreclosures. These have been paused due to legal issues over title. And the pause has encouraged ‘buy-to-let’ investors to increase their purchases. Their analysis suggests more people will need to rent, if home lending standard remain tight.
But, of course, this confidence could easily disappear, if the ‘shadow inventory’ of homes in foreclosure comes to market too quickly. This inventory probably equals the apparent inventory of homes being advertised by agents, and so could easily swamp potential demand.
Thus housing typifies today’s VUCA environment (Volatility, Uncertainty, Complexity, Ambiguity). As Unilever CEO Pail Polman has said, ‘Its very difficult for people to get a total picture’.
In these circumstances, companies cannot afford to gamble on guessing right. Scenario analysis has thus become essential as we move into Budget season.