US house price recovery “living on borrowed time”

Consumer demand


US house pricesJan14aHousing used to be the key driver for US chemical demand in the SuperCycle, and went into overdrive in the subprime era between 2003-6, when housing starts rose to 2 million/year.  We don’t yet have December’s data, but we already know that 2013’s total will be only half this level, despite all policymakers’ efforts to revive the bubble.

Rather than face reality, however, policymakers instead continue to promote the idea of a ‘housing recovery’.  The reason is that a new downturn in housing will explode the myth that current policies can somehow return us to SuperCycle growth levels.  But memories are not that short and people will not easily forget what happened in the sub-prime bubble, as we documented in chapter 2 of Boom, Gloom and the New Normal:

  • The overall value of US housing doubled from $10tn to $20tn between 2000-5
  • Americans extracted $564bn/year in mortgage equity between 2001-5 according to the Federal Reserve
  • This added an average of 6.7% to their disposable income
  • Rising home prices also encouraged a ‘wealth effect’, causing the saving rate to drop from 4.7% to just 1.6%

The blue line on the above chart is a graphic reminder of the madness that occurred.  Created by Prof Robert Shiller, probably the leading expert on US housing markets, it shows the amazing bubble that caused prices to double from their long-term average in just 6 years.

Policymakers are now busy trying to inflate a second bubble, but this time they have major headwinds to overcome.  “Reversion to the mean” is always the most reliable investment strategy.  And plain common sense suggests that it is unlikely policymakers will be able to sustain today’s prices for much longer.  The trend is clearly downwards towards the long-term average, as the blog discussed when last updating the chart in July:

  • Since then interest rates (green line) have risen quite sharply, and are now nearly double their lows at 3%
  • As a result, US mortgage approvals are at a 13-year low as buyers have disappeared
  • The recent opportunistic buying by speculative would-be landlords is also coming to an end
  • Whilst home ownership rates have been falling for 10 years, and are now back at Q3 1996 levels

The best summary of the otulook, as often, comes from Prof Shiller and the latest S&P/Case-Shiller house price report.  In discussing the slowdown of prices since the summer they warn  that the “monthly numbers show we are living on borrowed time and the boom is fading“.



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