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 Worth	1986	1987	1988	1989	1990
	36.8%	37.3%	37.3%	36.9%	37.1%
	1991	1992	1993	1994	1995
	35.0%	34.6%	33.7%	33.9%	31.7%
	1996	1997	1998	1999	2000
	31.0%	29.2%	28.7%	27.7%	31.5%
	2001	2002	2003	2004	2005
	34.9%	39.2%	37.9%	39.0%	40.7%
	2006	2007	2008	2009	2010
	39.0%	36.3%	38.2%	34.8%	32.3%
	Q1 2011
	31.2%

...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)	1986	1987	1988	1989	1990
	15,836	16,902	18,452	20,184	20,516
	1991	1992	1993	1994	1995
	22,076	23,039	24,403	25,193	27,889
	1996	1997	1998	1999	2000
	29,947	33,538	37,483	42,543	42,688
	2001	2002	2003	2004	2005
	42,477	41,232	47,139	52,622	58,936
	2006	2007	2008	2009	2010
	64,147	64,169	51,370	54,084	57,114
	Q1 2011
	58,058

...is 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.

More Good News for the UK Housing Market?

If ever you needed conclusive proof that the UK housing market is rigged in order to transfer wealth from the young to the old, then please read this from Barratt Developments statement this morning...

Today we are also announcing a tie-up with Hitachi Capital (UK) PLC that will allow parents to borrow money to help their children onto the property ladder.  The product is unique in the market and is specifically designed to address current mortgage restrictions on loan to value.

In other words, we've given up focusing on getting young people into debt in order to prop up UK house prices. Instead, let's cut out the middle man and just get the parents directly into debt instead.

Meanwhile, in the six months to December, their completions were down to 4,832 from 5,053 last year. However, the average selling price was up 6% to £176k. As for the growth outlook...

Mortgage lending remains at unusually low levels and we view this restricted availability of mortgage finance as continuing to be the key constraint on market growth in the near term.

So much for the restructuring in the banking sector.

Although, one thing that has gone back to normal is that Lloyds CEO Eric Daniels looks set for a £1m bonus, whilst Stephen Hester has £2.5m lined up. Meanwhile, Bob Diamond thinks its time for the banks to stop apologising for the credit crunch.

Aside from the moral issues, the banking sector underperformed benchmark indices in 2010.


Conclusion

Prices up, supply growth slowing, the banking sector not lending money and now, parents are having to borrow money to pay for their parents houses. Meanwhile, the banking sector looks set to award itself £7bn in bonuses-of which Savile's estimates 1.6bn will go into the London housing market- after having seen increases in their salary in 2010 to counter weight the tax last year.

When will this madness end?

CFO Survey Indicates Good Growth Ahead

The latest Duke University Fuqua School of Business CFO Survey came out recently and it made pretty positive reading. First of all top line data in the States suggests an uptick in confidence...



source: cfosurvey.org

However, we see a slightly different story in the Rest of the World


source: cfosurvey.org

Essentially, what we are seeing here is confirmation of good growth in the US and in particular in retails sales. Ultimately, this has a concomitant positive effect upon those Asian countries that peg their currency to the US Dollar and are structured to export to the US. A classic example being Taiwan and how they rely on the US semiconductor industry via their manufacturing foundries.

China is not as strong and I suspect this reflects some macro economic concerns relating to the housing market and/or the Government trying to rein in inflation by increasing the banks reserve requirement ratio. Even so, Chinese business still forecast 19.1% earnings growth in the next year, as well as 11.3% increase in capital spending. Both of these numbers were above last the last quarters forecast.

In Europe, the numbers are noticeably weaker. This reflects the fears of pressure on the financial system from the European Sovereign Debt crisis. Earnings growth forecasts were reduced to 10.4% annual growth  but capital spending plans increased to 6.8% Worryingly, hiring plans were reduced to an anaemic .2% growth.

Returning to the US, we see that earnings growth is now forecast at a stonking 19.8% with capital spending plans increased to 8.9% Technology spending is predicted to increase by 4.8% and employment by 2% The employment number seems low, but it is actually the highest since March 2006!

Bullet Points on the CFO Survey

A few bullet points here

• Perhaps there is more to run in the capital goods sector?
• US Employment growth looks better
• Asia ex-China looks set for growth, but can they cope with any slowdown in China?
• Europe is reacting to Sovereign Debt fears

Conclusions on Duke CFO Survey

In conclusion, I think this survey perfectly encapsulates the dichotomy in the Global Economy. Growth in the US is getting stronger, but perhaps the differential between the US and Europe is explained by the relative sentiment of Sovereign Debt? If so, than should US Municipal Bond fears flare up than the solidity of the recovery will be called in to question. I think 2011 is delicately poised.

It looks like Spain is in trouble and I expect more action will be necessary by the ECB. I would not rule out the creation of 'Euro bonds' before the end of 2011. Whether the US Municipal Bond Market falls victim to negative sentiment is anybody's guess. However, I note that, whenever I check it on CMA Datavision, the market is pricing in the probability of default in California as being similar to that in Italy.

Moreover, any slowdown in the US housing market will hurt revenues in California and Florida. There are also question marks over the probability of China engineering a soft landing for its housing market.

With regards asset allocation, I still consider market neutral to be the optimal strategy for 2011.