Housing and GDP - What's the Real Story? (Part II)

by: HiddenLevers

<< Return to Part I

We looked at economic growth vis-a-vis new home sales in this country in our last posting. But after looking at new home sales, it made me wonder how home ownership in general is stacking up alongside the rebounding economy. We’ve heard many a-tales of homeowners who are underwater in their mortgages, some who are now technically squatters in their own homes. But the economy is rebounding, jobs are coming back to Main Street, and people are starting to be more willing to make large purchases, yes?

Well, a recent New York Times article seems to think so, stating that the overall housing market has “stabilized” at a level higher than the 1990s, but not at the level by which homes were being bought leading up to the housing crisis in 2005 and 2006. Ok, fair enough. But is it really what we’d like to think of as stabilizing? If you look at the NYT’s graphs, that little bump at the end of the chart is what I guess they’re talking about as a sign of stabilizing. They may be right, but I, for one, am certainly not convinced. For all I know, this could be nothing more than the proverbial “dead cat bounce” (sorry to all my fellow feline lovers out there), which means that sales could continue to fall.

From what I see, to return to actual stabilized overall housing sales levels, we actually have a little bit more of a drop in sales to go. Because new home sales have been such a small fraction of overall home sales in general (as alluded to in the NYT article), comparing overall home sales to GDP growth would probably give me a redundant analysis from the previous story. So I instead compared U.S. mortgage rates with U.S. GDP growth because the rates have a huge hand in enticing home buying.

Chart created using Hidden Levers app.

Not surprisingly, decreasing mortgage rates generally coincide with higher GDP growth rates. But during the economic downturn, GDP fell as fast as interest rates - obviously in an effort to prevent the entire housing market from collapsing. Government bailouts put GDP growth back in a drastic upward swing but with the housing market in such disarray, interest rates stayed low and have for the most part decreased further still.

Low mortgage rates are clearly still not doing anything to boost home sales. Residential construction stocks are probably the closest thing to kryptonite right now, but somehow there are a couple of companies within the sector that are managing to rebound in terms of share price while the vast majority of companies within the sector continue on their downward spiral. The macro profiles of NVR Inc. (NYSE:NVR) and Toll Brothers Inc. (NYSE:TOL) indicate that these companies move more with mortgage rates than most other companies in residential construction but are faring better than the rest:

Chart created using Hidden Levers app.

There aren’t enough willing and able buyers to swing the housing market back up and high GDP growth is doing nothing to change the tune. Overall housing sales are low. How on earth can we be so naïve? The housing market is no longer indicative of how well our economy is doing. As the past year has shown, it has told us very little. Here’s hoping the struggling homeowners can overcome their underwater mortgages and potential homebuyers can qualify for a loan for the houses that they want. Hope might be all they have.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.