Fisher Investments US Property Market Update

A common perception among property bears is that falling US housing prices will lead to a decline in consumer confidence and ultimately to a slowing of the US economy. But, the underlying data tells a different story according to Fisher Investments.

Putting the cart before the horse
Property bears argue that declining home prices in the US will ultimately harm consumer confidence, contribute to weakness in other sectors through reduced consumer spending, and slow the US economy. But they are putting the cart before the horse according to Fisher Investments. The production side of the global economy is still robust, personal income growth is relatively strong, and borrowing costs remain low by historic standards. (Global growth data from Bloomberg Industrial Production: August y/y % changes are US 4.7%, Japan 6.0%, Germany 7.3%; Current borrowing cost data from Lehman US Aggregate Credit BAA Bond Index: currently 5.9%, average since 1976 is 9.3%; Personal income growth in the second quarter 2006 y/y, US data from Commerce Department: real disposable income up 2.8%; Japan data from OECD: real disposable income up 1.7%; UK data from Office of National Statistics: real household disposable income up 1.5%.) Therefore, Fisher Investments has little reason to believe that consumption and asset prices will decline precipitously.

What the figures tell us:

• While housing starts have fallen over 25% since the recent peak this past January, the annual rate of 2.3 million units was 30% higher than the previous high in 1999. Current levels are only slightly below the previous peak and are still strong. (Housing start data from US Department of Housing and Urban Development: August level is annual rate of 1.665 million.)
• Additionally, declines in the residential housing market have been offset by increasing gains in the commercial housing market. The net effects of the decline in residential construction knocked 0.7% from second quarter GDP, while commercial property investment increased GDP a nearly equal 0.6%. (GDP contribution data from US Commerce Department.)
• Existing home price declines are in the headlines too—down year-on-year for the first time since 1995. (Existing home price data from National Association of Realtors.) It is worth noting that '95, '96, '97, '98, '99 are not generally noted for stock market weakness in the US, with the S&P up 37.5%, 22.9%, 33.3%, 28.6%, and 21.0% (all in USD) in those years, respectively. (S&P 500 annual total returns data from Thomson Datastream.) That's not to say that property declines caused strong stock performance, more that it is certainly not unprecedented to have strong equity performance concurrent with a slowing housing market.
• Despite falling home prices, household net worth rose 7.9% year-on-year in the second quarter of 2006, and financial net worth was up 6.2% in the US. (Flow of funds data from Federal Reserve.)
• Mortgage rates are falling, having fallen in 9 of the last 10 months. (Mortgage rate data from Thomson Datastream.) As a result, mortgage applications were recently up 2% to the highest level since April 2006. (Mortgage application data from Mortgage Banker's Association.)
• Correlations that have recently been made in the media between S&P 500 performance and housing indices are exaggerated, in the view of Fisher Investments, and often use a selected period of time for the story rather than a more meaningful time from an historical perspective. (Housing index referenced is the National Association of Home Builders Housing Market Index.)

Andrew Teufel, Director of Research at Fisher Investments, said, “The bottom line of this discussion is that, like fears of inflation, avian bird flu, inverted US yield curve, deflation, hedge fund collapses, and the US budget deficit, this is simply another topic that investors have focused on to an unnecessary degree, creating a wall of worry. With hindsight I'm confident we'll see that this issue is vastly less significant than many currently believe and we continue to expect strong returns for global equities in the months ahead.”