Downunder Daily : Inflection Detection
US housing
activity may soon get worse at a less rapid pace. For now, that seems about
as bullish as one can get on US housing. Of course, the end of outright
contraction - something not in prospect until next year - will help growth. But
it seems likely that housing will face an extended adjustment period that will
limit the upside for some time. More importantly, I doubt that the inflection
point in housing activity will signal imminent relief from the credit crunch.
Most housing-related indicators continue to fall, but there's a hint that they're falling at a slower pace. Exhibit 1 shows the 12-month change in housing starts and the contribution to GDP growth from residential construction on a rolling four-quarter basis. We may be near the point of maximum contraction on both. Residential investment as a share of GDP has fallen from all-time highs to near the lows associated with deep recessions (Exhibit 2). Even if house building falls further, as our US team expects, it's clear the bulk of a collapse has been seen. (See Richard Berner, Has Housing Bottomed, and Is Recovery Ahead? 28 July).
Likewise, there has been some hint of stability in home sales figures in recent months (Exhibit 3 shows sales of both new and established homes).
Most housing-related indicators continue to fall, but there's a hint that they're falling at a slower pace. Exhibit 1 shows the 12-month change in housing starts and the contribution to GDP growth from residential construction on a rolling four-quarter basis. We may be near the point of maximum contraction on both. Residential investment as a share of GDP has fallen from all-time highs to near the lows associated with deep recessions (Exhibit 2). Even if house building falls further, as our US team expects, it's clear the bulk of a collapse has been seen. (See Richard Berner, Has Housing Bottomed, and Is Recovery Ahead? 28 July).
Likewise, there has been some hint of stability in home sales figures in recent months (Exhibit 3 shows sales of both new and established homes).
However, there may be another leg down in
these series. The turnover rate in the established home market is well off its
peak, but running only slightly below average levels. Given the link between
price changes and turnover rates, sales numbers could fall further (Exhibit 4).
How important would it be for housing activity to trough? It's straightforward to calculate the effect on GDP. Our US Economics team doesn't expect a sharp recovery in housing activity, but the absence of a negative would lift GDP growth. Housing contraction has cut US GDP growth by around 1%, so if it stabilizes by the second half of next year, GDP growth would accelerate by 1%, all else equal.
Arguably, the more important issue is what stability in housing activity would mean for broader credit conditions. My view is that that is unlikely to be a decisive change.
Although the credit crisis first gained prominence due to sub-prime mortgage stress, it's wrong to think that sub-prime caused the credit problems. The causality went the other way: The excesses in the sub-prime mortgage market were one manifestation of a credit bubble. Yes, sub-prime was the first part of the bubble to pop, and (perhaps) it was the area of most egregious excess, but I don't think that a bottoming in housing activity would signal either that housing-related credit conditions are easing, or that the broader credit crisis is in the last innings.
I expect that the impact of the credit crunch will intensify as the effect of tightening credit conditions slowly percolates through the real economy. In this context, it's important not to confuse the pace at which markets can price in the new credit environment and the (slower) flow-through into the real economy. What do I mean by this? Compare how quickly credit markets can re-price risk spreads (indeed, have) to the delay in those higher funding costs feeding through to borrowers. Corporate borrowers don't have to pay higher spreads until they refinance. That can take quarters, if not years. So even if spreads don't get wider, or lenders don't tighten standards further (Exhibit 5), the effect of credit restrictions on the real economy may not have reached its maximum.
This, in my view, is one reason why US growth data have not been as weak now as I expected, say, a year ago. Credit crunches take time to bite. My view is that the bite will get tighter in coming quarters, regardless of a possible inflection point in US housing activity indicators.
How important would it be for housing activity to trough? It's straightforward to calculate the effect on GDP. Our US Economics team doesn't expect a sharp recovery in housing activity, but the absence of a negative would lift GDP growth. Housing contraction has cut US GDP growth by around 1%, so if it stabilizes by the second half of next year, GDP growth would accelerate by 1%, all else equal.
Arguably, the more important issue is what stability in housing activity would mean for broader credit conditions. My view is that that is unlikely to be a decisive change.
Although the credit crisis first gained prominence due to sub-prime mortgage stress, it's wrong to think that sub-prime caused the credit problems. The causality went the other way: The excesses in the sub-prime mortgage market were one manifestation of a credit bubble. Yes, sub-prime was the first part of the bubble to pop, and (perhaps) it was the area of most egregious excess, but I don't think that a bottoming in housing activity would signal either that housing-related credit conditions are easing, or that the broader credit crisis is in the last innings.
I expect that the impact of the credit crunch will intensify as the effect of tightening credit conditions slowly percolates through the real economy. In this context, it's important not to confuse the pace at which markets can price in the new credit environment and the (slower) flow-through into the real economy. What do I mean by this? Compare how quickly credit markets can re-price risk spreads (indeed, have) to the delay in those higher funding costs feeding through to borrowers. Corporate borrowers don't have to pay higher spreads until they refinance. That can take quarters, if not years. So even if spreads don't get wider, or lenders don't tighten standards further (Exhibit 5), the effect of credit restrictions on the real economy may not have reached its maximum.
This, in my view, is one reason why US growth data have not been as weak now as I expected, say, a year ago. Credit crunches take time to bite. My view is that the bite will get tighter in coming quarters, regardless of a possible inflection point in US housing activity indicators.
| vestment Banking Clients (IBC) | |||||
| Stock Rating Category | Count | % of Total |
Count | % of Total IBC | % of Rating Category |
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| Equal-weight/Hold | 913 | 42% | 270 | 42% |
30% |
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| Total | 2,170 |
| 643 | ||
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