The Housing Recovery Is Not On Firm Footing

Housing is a meaningful input into U.S. real GDP growth, but data for full year 2014 suggest the tepid recovery may be faltering. Demand for residential mortgages for first-quarter 2015, according to the Federal Reserve’s Loan Officer Survey, indicates would-be home buyers are staying on the sidelines (or opting to rent). Home ownership, as indicated by full-year 2014 data, continued to “plummet” (as Goldman Sachs put it), down 1.2% year-on-year, the biggest drop in over fifty years of data collection. Tepid mortgage credit demand is further confirmed by the Federal Reserve’s March release of the Financial Accounts (formerly known as the “Flow of Funds”), which reported that although household debt increased 2.7% (annualized, quarter-over-quarter), mortgage borrowing grew only 0.7%. Weaker growth in mortgage credit makes sense given that home price appreciation has been accelerating faster than U.S. real GDP, 4.5% in December (annualized) according the Case-Shiller Home Composite 20 City Home Price Index, versus 2.2% fourth quarter economic growth, for example. Over roughly the same period of time, homes became more affordable despite higher prices, according to the National Association of Home Builders/Wells Fargo Housing Opportunity Index, which further supports the argument that the housing recovery is sluggish. Homes are more affordable, but people are not buying them. The silver lining, which Goldman Sachs conjectured may itself be short-lived, is that the Fed will continue to reinvest interest and principal from its sizable mortgage holdings into further mortgages, creating downward pressure on mortgage rates. Housing, which serves as critical ballast for economic recovery in the wake of the financial crisis appears to be either weakening or stabilizing in very mild growth territory, and our outlook reflects the possibility that it will no longer contribute sizably to U.S. real GDP growth or inflation. Our portfolio positioning reflects the possibility that things may get worse before they get better, and higher interest rates may be further off than is currently supposed.
Sources: Federal Reserve Financial Accounts of the United States (March 2015 filing), LA Times, National Association of Home Builders/Wells Fargo Housing Opportunity Index, NY Fed, SNWAM Research