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.

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 ( line)
  • Federal Debt (year over year % line)
  • Housing Starts, 1 unit private houses (year over year % 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 (as is happening now)...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.  Red goes up, black goes down...and blue columns rise...and vice versa.  The implications of the growing dependence on lower rates and accelerating rates of deficit spending for a nation with a debt to GDP ratio North of 100% are deeply troubling.

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)
While the chart above shows estimated 0-65yr/old population growth of 700k and 2.3 million for total population in 2017, I believe it may have actually been zero growth for the 0-65 population and perhaps as low as 1.6 million for total population growth (explained HERE ).  If correct and this trend persists, the US housing market is in far more near and long term trouble than I have expressed.

BTW - If you think interest rate changes and housing creation look'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 slowdown in starts has already kicked off the daisy chain that negatively impacts employment and the economy, but this time the interest rate flexibility will be next to nil...and thus the only tools left will be massive deficit spending and large(r) scale QE.

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).
Postscript -

As many have noted, federal debt growth in dollar terms (black line in chart below) is currently at a half trillion dollars and likely set to grow to a trillion plus based on demographic changes (slowing SS receipts, larger outlays, unfunded Medicare/Medicaid spending, etc.) plus tax cuts reducing tax revenue.  However, it is the correlation of federal debt growth in % terms (yellow line below, representing rate of growth) which seems to have greater impact.  As the total debt grows (essentially equal to the GDP), the denominator is larger and the resultant debt spending must be that much larger to have the same impact.  For example, to have the same impact as the '09 debt binge, a $4+ trillion increase (yoy) would be necessary to have the same impact as the $0.2 trillion spent in '83 or the $2.1 trillion spent in '09.