More signs of rapid slowing in US housing
Courtesy Gerard Minack
Morgan Stanley
Sydney Australia
Housing's Margin Squeeze
More evidence that US housing market has passed its peak. The National Association of Home Builders has reported that its monthly sentiment index fell to 50 in April, the lowest level (excluding the 11 September aftermath) since February 1996.
Housing-related sentiment is now in the midst of a very sharp retrenchment. Home-buyer sentiment usually leads home-building sentiment, so there will presumably be further weakness in the NAHB index in the coming months. In turn, home-buyer sentiment is largely driven by affordability, although in this cycle sentiment has taken an unusual time to be depressed
by falling affordability. The fact that affordability continues to deteriorate suggests that the
improvement in home-buyer sentiment seen in April won't be sustained.
Builders' sentiment is a reasonable lead indicator for new home starts. Exhibit 3 suggests that starts – which have pobably been boosted by unseasonably warm weather in the past few months – could be see a very sharp fall in coming months.
The big issue, of course, is how much the turn in the housing market will affect consumer spending and saving. The bull and bear arguments on this issue are relatively well known and have been well rehearsed.
A couple of points about this:
First, discerning the effect of the housing market slowdown will be complicated in the near term by the payback for unsustainably strong consumer spending over the past few months. As our US Economist Dick Berner has recently outlined, the recent consumer rebound was driven in part
by a fall in petrol prices and unusually warm winter weather. Dick expects a slowdown in coming months as the consumer faces another surge in petrol prices, higher interest rates and decelerating housing wealth. However, there will be offsets from the robust labour market, rising
wages and non-wage income gains.
Put another way: even if you are relatively optimistic about the outlook for the US consumer,
there are good reasons to expect softer consumer spending in the near-term.
The second point is to distinguish between the effect of the housing market slowdown on growth, and the effect on earnings. As I've discussed before, one of the remarkable features of the past few years has been the strength of consumer spending in the face of weak labour income. Whatever, the cause of this divergence, the simple fact is that this was a boon to corporate America: its largest single source of top-line growth (consumer spending) kept growing, even as its largest single cost (wages) were falling (as a share of GDP).
The optimistic view looking forward is that consumer spending will be supported by rising wage payments. This suggests that the wedge in Exhibit 4 will start to close – that is, that corporate America will face a growing margin squeeze.
As it is, I take a bearish view on the housing issue, but even if I'm wrong on that – and it looks like we'll find out relatively soon – I still think that the corporate America will face margin pressure heading into next year.
Morgan Stanley
Sydney Australia
Housing's Margin Squeeze
More evidence that US housing market has passed its peak. The National Association of Home Builders has reported that its monthly sentiment index fell to 50 in April, the lowest level (excluding the 11 September aftermath) since February 1996.
Housing-related sentiment is now in the midst of a very sharp retrenchment. Home-buyer sentiment usually leads home-building sentiment, so there will presumably be further weakness in the NAHB index in the coming months. In turn, home-buyer sentiment is largely driven by affordability, although in this cycle sentiment has taken an unusual time to be depressed
by falling affordability. The fact that affordability continues to deteriorate suggests that the
improvement in home-buyer sentiment seen in April won't be sustained.
Builders' sentiment is a reasonable lead indicator for new home starts. Exhibit 3 suggests that starts – which have pobably been boosted by unseasonably warm weather in the past few months – could be see a very sharp fall in coming months.
The big issue, of course, is how much the turn in the housing market will affect consumer spending and saving. The bull and bear arguments on this issue are relatively well known and have been well rehearsed.
A couple of points about this:
First, discerning the effect of the housing market slowdown will be complicated in the near term by the payback for unsustainably strong consumer spending over the past few months. As our US Economist Dick Berner has recently outlined, the recent consumer rebound was driven in part
by a fall in petrol prices and unusually warm winter weather. Dick expects a slowdown in coming months as the consumer faces another surge in petrol prices, higher interest rates and decelerating housing wealth. However, there will be offsets from the robust labour market, rising
wages and non-wage income gains.
Put another way: even if you are relatively optimistic about the outlook for the US consumer,
there are good reasons to expect softer consumer spending in the near-term.
The second point is to distinguish between the effect of the housing market slowdown on growth, and the effect on earnings. As I've discussed before, one of the remarkable features of the past few years has been the strength of consumer spending in the face of weak labour income. Whatever, the cause of this divergence, the simple fact is that this was a boon to corporate America: its largest single source of top-line growth (consumer spending) kept growing, even as its largest single cost (wages) were falling (as a share of GDP).
The optimistic view looking forward is that consumer spending will be supported by rising wage payments. This suggests that the wedge in Exhibit 4 will start to close – that is, that corporate America will face a growing margin squeeze.
As it is, I take a bearish view on the housing issue, but even if I'm wrong on that – and it looks like we'll find out relatively soon – I still think that the corporate America will face margin pressure heading into next year.