The views expressed in this column are those
of the author and not SVB Financial Group.
I ain't got a mudder
I ain't got a fadder
I ain't got a sister
Not
even a brudder
I'm a lonely frog
I ain't got a home
- Clarence
"Frogman" Henry
Many eyes have been focused on the housing market
over the past few years and for different reasons. To me, the importance of this
sector relates directly to the strength of our economy. Housing is the "cause"
and economic growth is the "effect."
This conclusion becomes obvious when
you think about the last time you moved. Most people do not simply take their
furniture from one place of residence — whether they rent or own — and place it
in their new living quarters. There are always additional expenditures that must
be made.
My last move effectively added two rooms to our living space: a
formal living room and an office/gym. Well, these rooms were not empty for long
and I can assure you we contributed our part to the economy in 2003/2004 —
especially the durable goods figures.
In addition to furniture, we humans
have a tendency to make other changes such as landscaping or even remodeling a
section or two of the house. No matter the quality of the home we've just
purchased, we feel the need to mark our territory through creative destruction,
even though no change in quality or use may occur.
Preference dictates
much of our spending.
All of these expenses add up and at the same time
filter through the economy. When we buy a sofa, the retailer has a hole in his
or her inventory to fill, which provides jobs not only for the manufacturer but
also the truck driver, the gas station attendant (we still have those, right?),
the security guard at the warehouse and even the designer who eventually updates
the style of furniture on the market.
These effects filter through the
economy, though perhaps at a decreasing effect, much like a bullet shot into a
pool of water.
So, what is it about housing that drives the economy? It's
turnover.
Certainly new home sales help the construction industry as well
as those mentioned and implied above. But even if two families simply swap
existing homes there will invariably be a strong positive effect on the economy
as the settling in occurs.
Turning to today's economy, take a look at the
chart below. This chart plots the published Fannie Mae mortgage rate alongside
borrower refinancing activity.
Source: Bloomberg, SVB Asset Management
You
can see tremendous spikes in activity. First, a so-called "refi-wave" occurs in
early 2008 as mortgage rates began decreasing from a recent high of over 6.5
percent. Then, beginning in late 2008 after the government took over Fannie and
Freddie and instituted a multitude of low-rate and borrower-assisted programs —
along with further rate cuts by the good folks at the Fed — we see an even
larger and longer-lasting spike in activity.
"Average Joes" were
definitely taking advantage of the lower rates. Unfortunately simply refinancing
mortgages does not lead to the follow-on economic effects we require.
Now
look at the next chart, which plots mortgage activity tied to home purchases
against the same mortgage rate index, and you will see a much different
story.
Source: Bloomberg, SVB Asset Management
Here,
it is clearly evident that home demand remains in the tank and has been
relatively unaffected by lower mortgage rates.
Why would this be the
case?
Well, lenders have become much more strict in this sector and, in
fact, typically don't lend without some sort of government subsidy. In fact, the
Mortgage Banker's Association recently reported that nine out of ten new home
mortgages has some kind of government support attached.
Lenders, it
seems, are wary of re-creating a non-government assisted mortgage market and on
the surface, it's hard to blame them. But the reality is the mortgage market is
a $13 trillion market that turns over every five to seven years creating a
fountain of fees on a fairly consistent and predictable basis.
If we can
set a course for how the government plans to interact with the mortgage sector
and commit to a long-term plan, I believe we will see private lenders reenter
this sector in force in order to catch some of the fluming fees — not to mention
the attractive carry even at these low rates.
And until we see a
full-fledged private sector mortgage market, I don't believe we will see an
active and dependable consumption pattern strong enough to support consistent
growth in the U.S. or indeed the global economy.
All those lonely frogs
out there are doing the economy no good.
Key
Developments
Consumer credit outstanding in April rose by $1 billion
to $2.44 trillion, while the March figure was revised down to negative $5.4
billion versus an originally reported rise of $2 billion. Consumers have been
cleaning their balance sheets over the past couple years as overall credit
outstanding has dropped from a peak of $2.58 trillion.
The Fed's June 9
Beige Book report reported strengthening in all 12 Federal Reserve districts,
though many reported growth as "modest." However, reading the report, the
outlook for future growth remains "cautious" especially given recent events in
the European economies.
The views expressed in this column are solely
those of the author and do not reflect the views of SVB Financial Group,
or SVB Asset Management, or any of its affiliates. This material,
including without limitation the statistical information herein, is
provided for informational purposes only. The material is based in part
upon information from third-party sources that we believe to be
reliable, but which has not been independently verified by us and, as
such, we do not represent that the information is accurate or complete.
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