Will Housing Follow Job Growth?
Allianz Global Investors
By Kristina Hooper
January 9, 2012
The U.S. economic picture got a little brighter last week helped by an improving job market and an increase in manufacturing activity, although housing continues to disappoint. But low interest rates, less debt and more affordable homes may end up being an unlikely economic tailwind.
Work in Progress
The big news last week was a positive surprise in nonfarm payrolls, which showed 200,000 new jobs in December versus expectations of 150,000 new jobs. The private sector added 212,000 new jobs while the public sector lost 12,000 jobs. As we have noted previously, this is a continuation of a longstanding, positive trend: public-sector jobs have decreased for 17 of the past 19 months. Also encouraging was the drop-off in the number of discouraged workers—those persons not currently looking for work because they believe no jobs are available for them—which fell by 373,000 from a year earlier to 945,000. Other positive employment news came in the form of the December unemployment rate, which fell to 8.5% versus expectations of 8.7%, marking the fourth consecutive monthly decline. The number of Americans out of work is now at its lowest level in almost three years. Capping the positive trend in the labor market was a report showing a decrease in the number of people filing for first-time unemployment benefits. Initial jobless claims for the week ended Dec. 31 totaled 372,000 as compared to expectations of 375,000.
Other economic data this week were also positive. Construction spending far exceeded expectations with 1.2% increase versus the consensus estimate of a 0.5% gain. Factory orders rose 1.8%, beating expectations of 1.6%. The ISM Manufacturing Index clocked in at 53.9 versus expectations of 53.2. And while the ISM Nonmanufacturing Index slightly disappointed, coming in at 52.6 versus expectations of 53, it remained well above the critical 50 level, which indicates economic expansion.
But one area of the economy that continues to show weakness is housing. Home prices continue to fall in most areas. At the end of December, the S&P/Case-Shiller Home Price Indices showed decreases of 1.1% and 1.2%, respectively, for the 10- and 20-city composites in October versus September. Nineteen of the 20 cities covered by the indices also saw home prices decrease over the month.
There is a silver lining to the housing story, however. The Housing Affordability Index is at an almost 30-year high, meaning that Americans buying homes will have very low carrying costs, thanks to Fed easing and weakness in housing prices. In fact, total debt owed by U.S. households as a share of their incomes has been falling since 2007 after having risen since the early 1990s, according to the Federal Reserve’s Board Measures of Household Debt Burden. While housing has been an obstacle for the current economic recovery, going forward it could prove to be another engine that helps power growth and quicken the pace of the recovery.
Fuel from the Fed?
Several Fed officials have been advocating recently for more stimulus focused on the housing sector in an effort to help jumpstart the economy. On Friday, Fed Governor Elizabeth Duke urged regulators to enable more borrowers to take advantage of existing low interest rates for purchasing or refinancing homes. She also emphasized the need for alternatives to foreclosure and ways to make it easier to convert foreclosed properties into rental housing. New York Fed President William Dudley echoed her comments and advocated for enabling more mortgage refinancing as well as principal reductions for some troubled borrowers to address “inefficiently low levels of mortgage modification.”
Their comments support a Fed white paper released last Wednesday and sent to key members of Congress. The paper outlined similar suggestions about how to improve the housing market. There is a significant number of homeowners who are unable to refinance because of tighter credit standards. Many of them have been precluded from refinancing because they don’t have enough equity in their homes. Allowing these borrowers to refinance at today’s lower rates would take some of the burden off homeowners weighed down by marginal employment or unemployment and could inject more spending money into the economy.
Fed officials are wise enough to recognize that if the benefits of mortgage refinancing were made available to a larger portion of the population, then Fed easing would be far more impactful. However, the implementation of those policies is a big "if." In the meantime, there is likely to be a tug-of-war in the stock market as positive economic data, coming from areas like employment and manufacturing, play pole position with more negative economic data. Geopolitical issues such as Iran’s actions in the Strait of Hormuz—which could significantly boost the price of oil—as well as continued jitters over the European debt crisis and uncertainty over the strength of corporate earnings could be a rally killer. But as long as we continue to see improving vital signs for the economy in the face of heightened volatility, there is a foundation for solid equity returns over the longer term. Perhaps the markets will even develop immunity to negative headlines.
Kristina Hooper, CFA, CIMA, is head of portfolio strategies at Allianz Global Investors Distributors LLC.
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The Institute of Supply Management (ISM) Non-Manufacturing Index measures growth in various industries, including agriculture, mining, construction, transportation, communications, wholesale trade and retail trade. A reading above 50 indicates an expansion. The ISM Manufacturing Index is a composite diffusion index of national manufacturing conditions. Readings above 50 indicate an expanding factory sector. The Housing Affordability Index is a standard established by the National Association of Realtors to gauge the financial ability of consumers to buy a home.
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