Monday, January 22, 2018

Rising Rates and Decelerating Deficits Spell Doom For Housing (Again)

I recently wrote an article explaining why a 30% to 50% decline in household net worth is imminent (HERE).  No shocker that the primary asset for most in figuring household net worth is real estate, particularly primary residences.  This article details why US housing starts and job creation are set to decelerate and a recession will almost surely follow... sending home prices tumbling (and likely equity and bond prices, to boot) severely negatively impacting US households net worth's.

First, the year over year change in housing starts (one unit variety) is highly indicative of the subsequent change (in 12 to 18 months) of full time employees (chart below...year over year change in full time employees blue shaded area) vs. YoY change in housing starts(red line)).  So goes housing, so goes subsequent jobs creation.


So then, what impacts housing creation?

The chart below shows three variables on a quarterly basis:
  • The federal funds rate (...black line)
  • Federal Debt (year over year % change...red line)
  • Housing Starts, 1 unit private houses (year over year % change...blue columns)
What is so noteworthy is the interplay of the changing debt creation and federal funds rate on new house creation.  As debt spending accelerates, interest rates are cut...and housing creation is prolific.

Conversely, when rates rise, typically federal debt creation decelerates...and housing creation declines.

The charts below show housing starts and federal debt on a year over year percentage changes (on a quarterly basis).  Federal funds rate is actual quarterly rate.

1968-->2017

The chart below highlights these variables from 1968 to 1996.  Spikes in debt creation, declines in interest rates, and housing creation soars...and vice versa.


Below, 1997 through 2017.


Finally, from 2009 through 2017.  The implications of the current rate hikes and deceleration of federal debt creation should be pretty clear for new starts and subsequently job creation.

Rising rates and decelerating federal deficits should mean decelerating or declining new starts and shortly thereafter declining full time jobs.  A recession will likely be concurrent to the job losses.

To round out the picture, the chart below shows:
  • Annual total US population growth (black line)
  • Annual 0-65yr/old US population growth (blue line)
  • Annual housing starts, 1-unit (red line)
  • Federal funds rate (dashed black line)


BTW - If you think interest rate changes and housing creation look interdependent...you're right (chart below).

Again, total annual total population growth, 0-65yr/old population growth, housing starts (1-unit)...but this time including annual change in full time employees.

I believe the interest rate hikes and decelerating deficits will slow housing and jobs creation...but even if I'm wrong, there is still trouble dead ahead as the US is simply running out of employable persons as the percentage of employed 15-64yr/olds is nearing all time highs (also known as potential homebuyers).