A couple of weeks back we were privileged to be invited to a breakfast session with Bill Evens - Chief Economist of Westpac Australia. This is his usual last leg of his annual round the world trip where meets up with with key economists and financial leaders from US, Europe, China etc.
This is the 6th session with him since 2009 and while in the past there were always variations as we compare notes about his outlook on the various economies, this time round I am glad to report that we have more to agree on than otherwise.
Although the session unsurprisingly Australia flavored, the most interesting takeaway from the session for us was how h expects the US recovery to be short lived.
The reasoning was simple. The US employment numbers are guesswork at best and does not reflect the true job situation. Wages are stagnating, posing a strong deterrent to price recovery. The job market is certainly now stronger, but not strong. Whereas in the past pent-up demand for new housing following a recession eventually overwhelms financial fears, causing families to start buying new houses. This time round, mortgage lending declined to the lowest level in 14 years. So why the difference?
The last round of recession left deep cuts
Remember Maslow Theory? Yes, the triangular illustration from our early school days. As we all ascend the different level of needs, our demand for goods and activities change along with our priorities. A recession has the effect of dropping our priorities down the level as assets, income and savings are destroyed. Maslow tells us that unless the lower level needs are satisfied the higher level needs are less of a priority.
The last recession was so severe that most were left with physiological even psychological cuts. Surviving financially becomes a main concern for many and housing is not at the forefront of their mind. The scars that will take time to heal and there is a lack of confidence in the market and government leadership to make a recovery. Understandably, jumping ontp the housing market aggressively would be the last thing on their mind.
The QE has not resulted in wage growth
Yes jobs were created but wages have remained stagnant on every level. The first tranche of employment will provide wages to get people back on their feet, but not necessary create exuberant buying that results in house price growth. Such recovery will likely be squashed by an early price hike, with fearful buyers pulling back quickly once they see any signs of what they deem to be irrational pricing.
There is no doubt that there is demand. But there is no confidence.
Even the much touted Phoenix market which has seen as much as 23% growth in the last 12 months is now stalling. The median single-family home price still grew 23% from November 2012 to November 2013. But sales fell 27% in teh same period resulting in one of the weakest sale month in Nov 2013.
The recovery was investor driven
The first to arrive on the scene of a bottom in any recovering market are investors. This is especially true in the over-funded market of today. Investors, institutional or retail, are all flushed with cash with no place to put them.
Institutional investors like Blackstone Group, Homes 4 Rent (AMH) and Colony Capital LLC have helped many markets recover from negative equity. But this is also an unnaturally inflation which in theory, is not a bad thing but in practice has a bad habit of turning into bubbles that will hurt the market in the long term. As we have seen, a housing market driven by investors with only commercial interests seldom result in happy endings.
Fed Chairwoman Janet Yellen said in a recent speech, “We are trying to make homes more affordable and revive the housing market. Our goal is to help Main Street, not Wall Street.” You can be sure that when Wall Street is benefiting more than the Main Street there will be actions taken to correct the situation.
US remains the biggest elephant in the room
And thus when a bomb goes off, however small and in whichever corner of the room, the elephant will always get hit. While most are concern about domestic economy of US, we are of the opinion that the US market is highly susceptible to whatever happens to the rest of the world.
Its no secret that the constantly challenged love-hate relationship between China and US will swing the markets back and forth. The fragile economic condition of the US is certainly in no position for any shock. But going by how things are in the world, shocks are probably what we can be certain of as resources dwindle and disasters lurk.
We hate to be the bearer of doom. And that is certainly not the case here. The bottom has been found, that is certain. But risks still abound and the US market, in our opinion remains to be a minefield that will take years if not decades to clear. The thing here is that the recovery may be a false start. Long term real recovery remains a distance off. But then again, a fragile western economy may be the new norm as the world get used to a highly connected global economy. Investors, will have to remain intelligent, informed and cautious as we go about our business.
But then again, that’s hardly news to us right?
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