Every few weeks I look forward to the jobs report that comes out the first Friday of every month. It’s not because I particularly like this report. It’s because the markets pay so much attention to it. Though I find it odd they typically only look at how many jobs were added, not the quality.
But that’s how you have to trade in today’s markets. You’ve got to know what the investment community is looking at, and how it responds. It’s a tireless job. Besides employment, other economic reports come out every day, and the markets have a different way of responding to each one. GDP, housing, consumer pricing – there’s a lot to look out for.
There’s been a lot of anxiety surrounding the housing market in particular since it crashed and dragged the global economy down with it 10 years ago. And Harry hasn’t been its biggest fan amidst talk of the “housing recovery,” because like many things in our artificial, Fed-driven economy, it’s been questionable.
So let’s take a look at where we were before the financial crisis of 2008/2009 and the top of the housing bubble in 2006/2007 to give us some context for where we are today.
First, look at the chart below showing construction jobs before and after the crisis:
Construction jobs have grown steadily since bottoming out in 2010/2011. You can see how this sector really bubbled up during the era of subprime lending that led to the crisis. Today, employment’s back to where it was before the bubble really got crazy.
Seems okay. Next, look below at home prices over the same period:
It follows a similar pattern, except it seems as if we’re quickly approaching price levels seen at the top of the bubble! After peaking in 2006, housing prices bottomed in 2012, and then the hedge funds started buying single-family homes as investment properties. This started the price rise, and the Fed’s continued low interest rate policy has fueled the rise.
So you can make the case that the Home Price Index seems high. But, just looking at the two previous charts, you would believe that our economy has completely turned around and good times are certainly ahead.
Take a look at the chart below showing New Home Sales from the year 2000 to present:
Even though new home sales are up about 80% from the bottom in 2011, sales are still 60% lower than they were at the top in 2005. And they’re about 35% lower than sales in 2000. That’s 16 years ago!
If you think about it, a lot of money and jobs revolve around the sale of a single new home. They’re vitally important to our economy. You’ve got furniture and appliance sales… utilities services… and before all that, construction and landscaping.
So you can probably understand that with fewer new homes, it would weigh down U.S. Gross Domestic Product (GDP) as well.
Well, if you look at GDP from 1960 to present, you’ll see in the chart below how housing contributes as a whole, and it’s not pretty:
As you can see, as a percentage of our entire economy, housing is only around 17.5% of our GDP. We are back to levels seen in the 1990’s, more than 20 years ago!
It’s true you’d expect this percentage to be less after the bubble burst. But when you think of the ripple effect that happens every time there’s a new home, you understand the problem by having less of them.
The statistics get worse. Home ownership as a percentage of households peaked in 2004 at 69.2%. Since then, it’s fallen to 63.8%, a level not seen since the mid-1960s!
Our research and demographics show that home ownership will keep falling. Our population as a whole is getting older, meaning we’re not buying new homes as much, and the younger generation certainly isn’t in a hurry to buy them either. Eventually they’ll inherit homes from their parents. All of which goes to show that the demand for new homes will fall further in years to come.
And if demand for houses is falling, it makes sense that prices will eventually fall as well.
So will construction jobs.
So will all the related industries I mentioned earlier that ripple from the new home market.
Given the trends in recent years, expect another upset in the housing market. This week alone we had a couple housing reports disappoint: the Housing Market Index and Housing Starts, which will be followed by Existing Home Sales and New Home Sales next week.
Editor, Treasury Profits Accelerator