The 'Mortgage Equity Withdrawal' Boom...Here We Go Again?

 |  Includes: IYR, XHB
by: Cullen Roche

Remember the great “housing ATM”? Well, according to Goldman Sachs, we’re starting to see that effect again. FT Alphaville’s Cardiff Garcia has a nice piece summarizing a recent Goldman note in which they make the case that housing could boost GDP. Here’s the key section:

First, the impact of housing is shifting into positive territory.The overall impact averaged around -1/4 percentage point in 2010-2011, stands at around +1/4 point now, and is likely to increase to +1/2 point in 2013. These numbers are equivalent to a move from a depressed housing market to a “normal expansion” as we defined it late last year, although they still fall well short of a “boom.” (These terms are all defined with respect to the growth contribution of housing; in level terms, housing still remains far short of normal, especially as far as residential investment is concerned.)

Second, most of the positive contribution to growth has so far come from the direct impact of residential investment, which we expect to contribute around 0.3 percentage points to growth next year. However, the wealth effect is also starting to contribute to the improvement as the swing from continued house price declines in 2010-2011 to house price gains in 2012 gradually makes itself felt in consumption.

Third, it is important to keep the improvement in perspective. Housing is likely to remain less important from a macroeconomic perspective than in the prior cycle, when the combined impact of residential investment and the wealth/MEW effect on consumption ranged from +1 percentage point in 2003-2005 to -2.5 points in 2008.

…The residential investment impact is taken directly from the GDP accounts, and the projection is based on our forecast that real residential investment growth will accelerate from 10.4% year-on-year in 2012Q2 to 13% in 2013Q4. The consumption impact via housing wealth and MEW is based on the consumption function estimated in our 2006 paper “Housing Holds the Key to Fed Policy” adjusted for the “leakage” from consumption into changes in net exports. In order to project these effects forward, we assume that house prices grow at a 2% pace from mid-2012 to mid-2013 and a 2.8% pace thereafter, in line with our most recent forecast.

As I described in the middle of last year, housing is the lynchpin in the balance sheet recession. It is the key component of household debt and if the BSR is going to end then the housing market needs to perk up. Now, I am not as optimistic as some others about housing (I generally think the declines are over and that we’re likely to perform in-line with the rate of inflation or lower going forward), but we should keep things in perspective.

Household balance sheets are improving and my long held belief that the BSR will end by 2013/14 is still looking pretty good. But I really don’t think we’re on the verge of a 2003 type housing boom where MEW becomes a huge problem and another housing bubble ensues. History just doesn’t support the idea that a bubble will follow a recent bubble. Rather, we tend to be sluggish for a long time. So, in my opinion, muddle through it is.