Listen to the full interview with Dr. Eisenberg by clicking the video link above.
Still reasonably optimistic.
During the AIBD 2013 Economic Forecast Webinar on February 5th, Dr. Elliot Eisenberg painted a somewhat rosy picture of a slow but steady recovery in the U.S. housing market. This week, AIBD Executive Director Steve Mickley caught up with Dr. Eisenberg and received an update to the forecast.
Dr. Eisenberg began by saying, “I’m reasonably optimistic. I wouldn’t say I’m bouncing off the walls. But I’m reasonably optimistic. There are four or five reasons why I’m feeling pretty good”. Before going into detail about each, he quickly summarized his optimism. “Inflation is tame, households and banks are improving their situations and home prices are improving. There’s a lot of good news out there.”
According to our economist, households have done a reasonably good job fixing up their balance sheets. The household debt evident four to six years ago has markedly declined. Using all measurement tools, households are doing better. One indicator, the number of households who have refinanced and reduced the length of their mortgage, is up to 27%. All the while, the ones who are lengthening their mortgages are down to 4-5%. Although households’ becoming more conservative is delaying our recovery, the conservatism is setting us up for a more solid recovery when it happens.
Another indicator is that household disposable income as a percent of debt obligations was almost 20% in 2007 and now is closer to 15%. In fact, the ratio has reduced substantially in just two years and is currently down to where the ratio was in 1980. Suddenly households have more disposable income. “I did not expect this to happen as fast as it has,” Dr. Eisenberg said with delight. “It’s a pleasant surprise and it’s one of the reasons why I think we will continue to see slow, steady growth.”
Additionally, household have ratcheted back by not borrowing on their credit cards as much. Historically, there has never been much, if any, household deleveraging like this going on during a recession or after a recession; in prior episodes it might not have increased, but it rarely goes down. “So seeing it go down is a great indicator,” views Eisenberg.
The last reason to be optimistic on the balance sheet side is household net worth. House prices are now going up about 5-6% over the last twelve months in addition to stock market improvements. The net worth of households is almost back to where it was before. “People have felt trauma and shock, but those who have equities are feeling pretty good,” says Eisenberg.
Getting our banking in order
Along with households, the banks are getting financially in shape as well. Eisenberg notes, “They may not be lending as much as we would like them to. But nonetheless, economically they’re in pretty decent shape.” He reports that their margins are low but their profits are doing quite well. “They can withstand a lot of stress-testing,” he adds. Having bank and household balance sheet improvement is quite important to the overall recovery.
Housing normally represents about 5% of gross domestic product (GDP) but fell to 2.5% of GDP as a result of the recession. It’s turning around and there’s a lot of legroom for expansion. When housing fell precipitously, the U.S. had been building a little more than two million units per year and dropped to about 500,000 – a decline of roughly three quarters. “I’m not saying it’s going to return to two million, but we are in for three or four years of reasonably solid growth in the housing sector,” Eisenberg predicts.
Multi-family housing declined and bottomed out in 2009 at about 70,000 units, annually adjusted, and it has roared back to over 400,000. By comparison, the single-family sector is showing about 600,000 units, annually adjusted. That is an improvement since hitting the bottom. But, single-family is not improving nearly as quickly as multi-family. So going forward, Dr. Eisenberg expects to see more activity in single-family construction while multi-family will still grow but at a significantly slower rate. One can speculate that multi-family building improved dramatically due to an unusual amount of people that had lost their homes and their credit ratings. But when he looks at the data on multi-family, he thinks, “The party is nearing its end.” Conversely, he sees the number of single-family starts growing by 20% per year and total starts peaking at around 1.7 million total units in three to four years.
Companies show us the money
U.S. companies have become very lean and mean, which has resulted in spectacular profits. Even though GDP growth hasn’t increased much from its last peak, these profits are making people who own stocks, either directly or through retirement accounts, much happier. “There is nothing telling me that there is going to be explosive growth,” adds Eisenberg. “But you see, under the covers, things are improving”.
Cost of goods is good
Dr. Eisenberg expressed concerns about inflation: “When is it going to rear its ugly head?” he quipped. But he assures us, he does not detect evidence of inflation going above 2.5% in the near future. By all the measures he uses to follow inflation, all are below the figures that would cause alarm bells to start ringing. As a result, he does not expect that the Feds will stop their current fiscal policies. Though more rapid growth would be welcome, the slow recovery allows the Feds to maintain pressure on low interest rates, which should continue to encourage home construction and remodeling.
Give it to us straight, how long have we got?
Although we may not have felt like we were enjoying a recovering economy, the “Great Recession” officially ended in the middle of 2009. So Dr. Eisenberg started asking, “What if?” “What if the Federal Reserve began to tighten, etc?” But in every single case, Eisenberg came to the conclusion that there’s not a chance of a recession occurring. “Unless the monetary and fiscal policies become crazily insane and Congress does stupid things”. Barring that or another major unforeseen event, such as a 9/11-style terrorist attack, he doesn’t see another recession arriving for at least another three to four years. So, we have a good long time to get our ship in order and to increase housing starts.
Eisenberg explained that the continued sluggishness is caused by the serious fiscal headwinds we are moving into. “Congress has largely solved our national budget problems and the budget deficit has rapidly declined from its worst in 2009 of 10% of GDP to possibly 3.5% of GDP by the end of next year, which is, pretty much, a sustainable level,” said Eisenberg. Change in the budget deficit of that magnitude normally only occurs after wars or generally pushes the country into a recession. “So the fact we are not in a recession, despite this massive fiscal contraction, is a tribute to our economy and our resiliency”. Absent this contraction, our economy would probably be growing a percent faster.
Expect more of the same
All in all, Dr. Eisenberg holds firm on his original predictions of multi-family starts continuing to increase. Though, not as fast as they have been. Single-family starts will improve nicely to well over 100,000 to maybe 150,000. They will increase consistently about 20% over the next three to five years with total starts peaking at about 1.7 million.
Elliot Eisenberg, Ph.D. is a nationally acclaimed economist and public speaker specializing in making the arcana and minutia of economics fun, relevant and educational. He holds a B.A. in economics with first class honors from McGill University, as well as a Masters and Ph.D. in public administration from Syracuse University. Dr. Eisenberg, formerly a Senior Economist with the National Association of Home Builders in Washington, D.C. Visit his website, www.Econ70.com.