What Lies Ahead for US House Prices?
Can you open a financial paper today without an article on the slowing housing market? Everyone is looking for signs of an impending fall in housing prices. From the Sacramento Bee, we read:
"Jim Eggleston, owner of Sacramento's biggest residential 'For Sale' sign installer, predicts this will be his busiest week in 21 years in business. He's had to hire an extra worker and buy a new delivery truck since his crew planted a one-day record of 225 signs on Monday.
"'There are whole lot of houses going up for sale,' says Eggleston, who promises next-day installation when a real estate broker orders a new sign. 'The number of 'For Sale' signs we're removing keeps going down relative to the number we're putting up.'"
And from the Palm Springs Desert Sun, we read (and note the last sentence!)
"Price rises come as local sales counts have recently been falling, and the inventory of unsold resale homes is up dramatically from a year ago. According to DataQuick, the total 1,259 new-construction and resale homes sold in July was down 12.1 percent from a year ago.
"And unsold resale inventory is currently at around 3,452 properties, according to Greg Berkemer, executive vice president of the California Desert Association of Realtors. That figure is up 63 percent from a year ago and is more than twice the 1,400 seen in April 2004."
"The number of listings of single-family houses in 17 towns in Greater Boston was up 25 percent or more last week compared with one year ago. And those houses are taking longer to sell. In four towns, listings increased 50 percent or more," says MSN.com.
Recently the Wall Street Journal did a cover article on rising home inventories all over the "hot markets" in the US. The median price in the past five years has risen at triple the level it did on the previous thirty, which included a powerful inflationary period. Trees don't grow to the sky, and the housing market is due for a breather, at the very least.
But if home building starts to slow down, you will see the economy soften. GDP in the second quarter was 3.4%, but the increase in residential investment was 11%. Dean Baker at the Center for Economic and Policy Research tells us: "The jump in residential investment raised the share of housing construction in GDP to 6.0 percent, surpassing the peak hit in the late seventies, when the baby boomers were first forming their own households. If the housing bubble persists, this share will grow even higher in future quarters.
"...The immediate path forward looks very shaky as the economy is ever more dependent on the housing boom and debt. If wage growth does not begin to pick up, it will be difficult for this cycle to continue much further. However, if wage growth does pick up, then inflation will accelerate, pushing up interest rates, which will burst the housing bubble."
Residential construction typically accounts for about 20% of GDP growth in the US, although it can swing dramatically. It was in the 20% range in the first quarter. It dropped during the 1990-1 recession only to rise to 30% in the following year. And when residential fixed investment turns down it usually leads the economy into a recession.
If we take the experience of the slowdown and flattening of both the UK and Australian housing markets, it would suggest that consumer spending would slow significantly if housing prices in the US were to stop their relentless rise. Forget about what would happen if housing prices actually started to fall.
My take? Housing will slow down over the next year. How much? Right now mortgage rates are roughly where they were one year ago, except for Adjustable-Rate Mortgages. The answer lies in how much rates rise or how much the economy slows down. Greenspan and the Fed are determined to slow the rise in housing prices down and the Fed can engineer a slowdown in housing prices if they decide to do so.
When 20% of the growth in GDP is housing, that is significant. A modestly slowing housing market could tip the economy into recession, especially if consumer spending is also being impaired by rising oil prices and interest rates.
By John Mauldin
John Mauldin is president of Millennium Wave Advisors, LLC, a registered investment advisor. To subscribe to John Mauldin's E-Letter please click here.
