Many times in these pieces I’ve commented on how the housing sector has large implications throughout our country’s economy. There’s no shortage of evidence that this particular sector was a major contributor to just how bad things went in our economy in recent years. Perhaps now the time has come for it to become a positive contributor to the economy instead of one of the major detractors. Set aside for a moment the fact that I think now is a wonderful time to buy a house – either for personal use or for rental investment – and think about the broad scope of jobs and economic activity that is created when housing comes up off the floor. The jobs picture extends far beyond those you immediately think about at homebuilding and construction companies. Think about all the jobs that were lost in the downturn. There were layoffs and firings at municipalities, retailers, lending companies, and the list goes on. There’s no reason for all of those jobs to return. But since we are talking about a relatively large piece of the overall economic pie, even a reasonable percentage of those jobs coming back on line in the coming years will move the employment needle. It is also important to factor in the emotional elements. After years of people seeing their home value decline, the overwhelming majority of the country is now seeing consistent increases in those values. Simply put, they feel better about themselves and their financial viability. This shows up clearly in recent consumer confidence and sentiment readings. This inevitably leads to strong retail sales – of virtually everything, not just housing related items. A Schwab report I reviewed yesterday noted that we are now at a five-year low in foreclosure filings. Not only is this good for home equity, it is good for homeowner confidence. This has the potential to create a virtuous cycle of economic activity.
One of the longstanding fears about the residential housing market is the “phantom inventory” out there. This refers to the number of houses that investors own that would be willing to sell them the minute they see any pick-up in activity in their area. The fear is that the known inventory on the market is just a drop in the bucket of houses that people would actually like to sell if they had a chance. The stories I’m hearing and reading about debunk this fear. Yes, there is still a certain degree of this “phantom inventory” out there, but many people who once thought of selling off their rental or vacation units in the past have seemed to change their minds. Why? I can think of two immediate reasons. One is that they feel they are so far below where they thought they’d be on the properly price-wise that they figure they might as well just hang on for the long term. And the other is simply that the cost of carrying that property has dropped significantly for most of these folks. With mortgage rates at historic lows and the pool of desirable renters grinding higher, owners are finding that holding onto those properties in this environment is actually profitable. Not everyone would have been able to refinance their properties and these lower rates, but many certainly were. The end result is that a large group of people once perceived as being ready sellers now find themselves as relatively content owners. The fear of the “phantom inventory” has come down, which has helped pave the way for some of this housing recovery, I believe.
What about the economy beyond housing?
In short, it continues on a slow crawl forward. It is concerning that the pace of recovery seems to have slowed in recent months. But the trend is still upward. According to research cited by the economists at First Trust, households have the lowest financial obligations ratio since the early 1980’s. This ratio is the share of after-tax income needed to make recurring monthly payments, such as mortgages, rent, car loans/leases, as well as debt service on credit cards, student loans and other lending arrangements. So even through we’re not seeing the type of wage growth we would need to see to get this economy really rolling again, these factors provide important room in the typical household budget each month. And it seems that some of this money is being saved by the average household, which is a comforting sign. But a fair share of it is also being spent. As I said earlier, consumer confidence is on the rise with the recent data on housing, unemployment, and the purchases of durable goods being better than anticipated. While those readings were still far from ‘good’, they do continue to trend the right way and the average American consumer is simply more comfortable and more active these days.
What about the Election?
This, of course, is the hot topic. And while it isn’t insignificant, it also isn’t anywhere near as important as most people would think. More important than just the Presidential race are the battles for the House and Senate. I obviously don’t know who will win, but I am willing to make a prediction on the impact of the financial markets. It is my belief that asset prices will be higher a couple years from now – and likely comfortably higher – regardless of the winner of the election. Of course, the reason for the higher asset prices won’t be the same; but the results likely will be.
The financial markets and the economy are not the same. People who tend to link them too closely also tend to perform poorly as investors. The markets can move higher, or lower, despite current economic conditions. With that said, both candidates offer things the markets – not necessarily the economy – like. For example, if President Obama serves a second term, there is a high likelihood that the markets will continue to benefit from ongoing stimulus – something I’ve seen referred to as the Bernanke Asset Bubble. The key refrain will continue to be “don’t fight the Fed”. If Romney takes the White House, the markets anticipate more right-sized regulation and more favorable tax and growth policies. It can be hotly debated which approach is better for our nation in the decades ahead. But that’s not the most relevant issue at hand for investors for the coming few years. There’s no doubt that each candidate has views that will swing favor either from or to certain sectors within the markets. But on the whole, the path of least resistance under either administration is likely higher. Please do keep in mind, however, that it shouldn’t be alarming if the markets pause or even dip with the announcement of the winner of the election. In fact, I think it is time for a pause in the markets anyway, so I’d welcome this breather for a bit, regardless of the catalyst. In the end, I believe it will be a pause that only refreshes the upward trend.
The takeaways:
- The all-important housing sector of our economy continues to gradually mend. Home affordability – measured by the cost of the average house as a percentage of average income – is very attractive and bodes well for a slow, sustainable recovery. This will help the economy in a broad sense. If you have a long enough time horizon (say, five to ten years or more), I find it hard to believe you can go wrong by acquiring real estate at these prices and financing rates.
- Don’t fear the election – not as an investor, anyway. I fully recognize this is a polarizing election, and I completely understand why. But from a purely investment oriented view – for quite different reasons, each candidate is likely to be seen as a decent outcome for the markets.
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