Wednesday, June 22, 2011

Housing and the US Economic Outlook

Ok, the US housing market still looks like it is bouncing along the bottom, but does this mean that US consumption spending will remain weak? I suspect the picture is mixed and consumer spending growth will remain weak as a consequence. However, real estate is less important to the US then in, say the UK. Moreover, quantitative easing and economic growth has caused other US Household Assets to rise. There is more to the US economy than housing!

Firstly, this week saw yet more weak data on existing home sales from the National Association of Realtors. You can read the report linked here of which the key conclusion is that the inventory of existing homes is 3.72m. This number is higher than the inventory in 2008 and current existing home sales levels are implying that the months supply of homes is at 9.3 months when the long term average is closer to 6-7months.

Secondly, according to Corelogic report on shadow inventory which is linked here...

In addition to the current shadow inventory supply, there are nearly 2 million current negative equity loans that are more than 50 percent “upside down” that will likely become shadow supply in the near future

...and this implies even more pressure on the housing market.

Real Estate not as Important to US Net Household Wealth Anymore

However, the picture is not so bleak for US consumption growth. I decided to take a look at the portion of net US Household Wealth that is being taken up by real estate...

Real Estate % of Net Worth19861987198819891990
Q1 2011

...and it is not hard to see that the percentage of US Household Net Worth held in Real Estate has declined in recent years from the peak in 2005. What is also noticeable is that the ratio declines noticeably in the 1990's and, I suspect, this is largely to do with strong economic growth coupled with rising stock market evaluations. Following the 'dot-com' recession, interest rates were reduced significantly leading to the switch into the next asset class boom.

However, the overall key to economic growth is Net Household Worth and this...

Net Worth (bns)19861987198819891990
Q1 2011
58,058 still growing. Although, note that it is still below the levels set in 2005!

All of which, leads me to believe that there will be no 'double-dip' but that the growth outlook leaks to be moderate, at best. There is more to the US Economy than housing.

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