Bill McBride of Calculated Risk offers his Thoughts on Residential Investment Recovery
This is a must-read post. Here is a brief summary:
• Residential investment (RI) is the best leading indicator for the economy. This isn't perfect - nothing is - but RI is usually a strong leading indicator for the business cycle....
• In 2011, residential investment will make a positive contribution to the economy for the first time since 2005....
• ...As the excess supply is absorbed, new residential investment will increase in some areas – and will probably return to normal sometime in 2014 - or as late as 2017 - depending on the actual number of excess vacant housing units. I'm leaning more towards 2015 or 2016...
The housing crisis is still very much with us.
I'm a big fan of Calculated Risk, but it's indisputable that McBride underestimated the extent of the housing bust. As housing prices plummet in 2011, it's hard to buy his view that that housing will make a positive contribution to GDP in 2011. Rather, his view that housing is a leading indicator for the macro economy leads me to believe that we are in for a deep dive in 2011...
ReplyDeleteDetroit Dan, if you read the entire post, you will see that single family units are not coming back in '11. The market overhang is still huge with shadow inventory yet to come online.
ReplyDeleteThe '11 contribution is from multi-dwelling units (apartments), as rentals rise. Dr. Housing Bubble pointed out recently that a lot of people are turned off to homeownership as an investment since the crisis, or just can't afford to own, and are renting instead. This is raising demand for rentals, as well as rents, and increasing investment in new construction of apartments. This is the only bright spot in a dismal residential sector at present.
My impression is that residential investment has double dipped with a vengeance. If that is true, then as RI is "the best leading indicator for the economy", we are in for a crash this year. Perhaps I'm conflating prices with investment, but I would think that the double dip in prices would discourage investment. Combined with net mortgage equity withdrawal going negative (i.e. people are no longer using their homes to fund consumption and expand the economy), I get the sense that housing will indeed lead us into a double dip...
ReplyDeleteMcBride is saying that inventory is high, especially bank REO and foreclosures in the pipeline. This will depress housing for some time, he opines '14 - '17. A double dip in residential RE is likely, which would weigh on the economy, since housing figures into so much other spending.
ReplyDeleteWhat Mc Bride is saying is that new construction is picking up in multi-units (apartments). That is the only bright spot. It's enough to push new construction into the positive in '11, barely. But it is a turnaround.
So, bad news in residential for another few years, but some new construction of apartments for people who either don't want to own or cannot afford it (more likely). The residential market is shifting toward rental property.
CR is fantastic. What I am questioning is the following statement he made:
ReplyDelete"This positive contribution from residential investment suggests the economy will continue to grow all year and also in 2012 (point 1: RI is best leading indicator). There are plenty of downside risks, but I expect the expansion to continue."
As you note, his overall real estate assessment is still gloomy for 2011, and given the leading nature of residential investment I would expect to see a lag between the time that RI turns up significantly and the time the economy turns up significantly. If RI is the best leading indicator, and RI has been down in the recent past, we should be down now.
My feeling is that we're at the top of the business cycle now, with high commodity prices and industrial production ready to fall hard as consumer spending tanks because of stagnating incomes and wobbly government support. Minor increases in RI, while RE prices continue to slide, will not be enough to overwhelm the larger forces at work...
Dr. Housing Bubble, The never ending pipeline of shadow inventory – 1,800,000 homes in foreclosure while another 2,000,000 are underwater by 50 percent. No housing recovery without clearing out shadow inventory and expanding real household wages.
ReplyDeleteMy reading of CR's recent posts is that he is reflecting the consensus view of continued weak recovery with the possibility of a shock leading to a pull back.
ReplyDeleteI agree with your reading of CR, Tom. Watch out for the business cycle though. Anytime commodities and industrial production are soaring, while consumption is stagnant, you can bet that there will be massive excess inventory and a significant correction. The Republicans will be reluctant to support more stimulus, and the Fed will hopefully be reluctant to buy private sector debt, so the next slump could be worse than the first one...
ReplyDelete