Shane Oliver, Head of Investment Strategy
& Chief Economist
The US housing sector
turning 1 or 2
Headingthe corner EDITION 9 – 16 MARCH 2012
Oliver’s quietly bottomed and is now on the rise again thanks to a surge
in shale oil production. The US has huge reserves of shale oil
Insights and advances in fracking technology (by which shale kilometres
below the surface is fractured using explosives, allowing oil to be
released and ﬂow to the surface) and oil prices around US$100
Key points per barrel are making it economic for these reserves to be tapped.
> Bulletsit’s too early to call the end of the secular bear
While Some even see the US becoming self sufﬁcient in oil again in the
market in US shares, there are some signs of light in the US
economy, notably in manufacturing, energy production and US housing bottoming
A collapse in the US housing sector was at the core of the sub-
> In particular, after triggering the global ﬁnancial crisis, the prime mortgage crisis in the US which subsequently morphed
US housing slump appears to be over and a recovery in into the global ﬁnancial crisis. US house prices and housing
prospect. construction surged into the middle of the last decade as lax
lending standards underpinned a huge surge in home ownership.
> This will help prolong the current US economic recovery,
Boom turned to bust, starting around 2006 as housing supply
boost household wealth and over time and add to global started to surge and it became harder for sub-prime borrowers
commodity demand. to reﬁnance their loans. Foreclosures rose, made worse in turn
by rising unemployment as the whole process fed on itself. The
subsequent slump has seen a 34% plunge in house prices. This
Introduction has seen the volume of private residential investment collapse
Starting with the bursting of the technology bubble in 2000, by about 60% from its peak in the mid 1990s, resulting in a huge
the fortunes of the US economy have waned. Since then, the drag on US gross domestic product (GDP) growth.
US has seen two recessions with the last being the worst since
the 1930s, a rising trend in unemployment, the bursting of a Why the worst is likely over for US housing
corporate debt bubble with the tech wreck and the bursting of a There are good reasons to believe that the US housing market is
housing debt bubble with the sub-prime mortgage crisis. So it’s bottoming and starting to recover.
little wonder the US share market has been spinning its wheels The ﬁrst thing to note is that most US housing indicators have
in a secular bear market. Some commentators even talk of a stabilised. Home sales have been bouncing along a bottom since
permanent decline for the US. 2009. Housing starts and permits to build new houses have been
The high level of US public debt, ongoing private sector deleveraging, bottoming since late 2009. Furthermore, the National Association
less business friendly policies, demographic trends and the absence of Home Builder’s conditions index has now broken out on the
of extreme share market undervaluation suggest the secular bear upside, pointing to a rise in starts ahead.
market in US shares may not be over yet. That said, it would be
Home builders conditions point to stronger housing starts
dangerous to write the US off. Many did this in the 1970s only
to see it roar back with a vengeance in the 1980s and 90s. More 2500
importantly, there are some signs of light at the end of the tunnel for 2000 Starts, '000
the US in manufacturing, oil production and housing. This note takes 1500 50
a look at these sectors, focusing on the latter as housing was the 40
original driver of the global ﬁnancial crisis.
500 National Assoc of Home Builders'
US manufacturing renaissance conditions index (RHS) 10
Recently there have been numerous examples of companies 86 88 90 92 94 96 98 00 02 04 06 08 10 12
setting up manufacturing plants or expanding production in Source: Bloomberg, AMP Capital
the US over locations in Canada, Mexico, Japan or the emerging Second, the number of vacant homes is now starting to fall
world. These include Maserati, Toyota, Honda, Nissan, Kia, Intel, sharply. Over time the equilibrium number of vacant homes has
Whirlpool and Caterpillar. In fact for the ﬁrst time in over 35 increased in line with the rising population. This is proxied by
years, annual growth in manufacturing employment is exceeding the long-term trend line in the next chart. It can be seen that
employment growth elsewhere in the US economy. The key the gap between the actual number of vacant homes and its
drivers of America’s manufacturing renaissance are restrained long-term trend is now closing rapidly. Related to this, household
unit labour costs in manufacturing (which have been unchanged formation is likely to rise sharply. Since 2006 it has been running
for the past 30 years), rising wages in emerging countries, the well below that implied by population growth and has collapsed
low US dollar (US$) after a decade long slump, and cheap energy from a record 2 million to around 700,000 last year. This reﬂects
prices helped by surging natural gas supply. While it’s early days tough economic conditions causing young people to stay at home
yet, America’s manufacturing renaissance has further to go. with their parents for longer and is likely to rebound as economic
conditions improve. If the number of vacant homes continues to
Surging oil production decline at the same rate as the last couple of years and household
US natural gas supply has been surging for years resulting in formation picks up then the overhang of housing will likely be
low prices. More signiﬁcantly, a few years ago US oil production gone by year end.
The US inventory of vacant houses has almost fallen back Similarly, house price to income and house price to rent ratios
to its long-term trend have collapsed, pointing to good value in US housing.
12000 US house prices back to fair value or cheap
Thousands Total vacant
10000 houses 30
% deviation from long-term average
6000 15 US house price to
Long-term trend 10 rent ratio
65 70 75 80 85 90 95 00 05 10 -5 US house price to
-10 income ratio
Source: US Census, AMP Capital -15
1991 1995 1999 2003 2007 2011
Third, the stock of unsold new homes has largely vanished. It is
now at its lowest level since the 1950s. This seems more extreme Source: OECD, AMP Capital
when it is compared with the fact that the US population has The improvement in US house price valuation measures stands
more than doubled since then. in stark contrast to the still very overvalued Australian housing
market…but that’s a different story. Note both the US and
The stock of unsold single family homes for sale has almost Australian charts use OECD data for consistency.
.... in stark contract to Australian housing which remains very
450 50 % deviation from long-term average
300 Australian house
250 20 price to rent ratio Australian house price
200 10 to income ratio
65 70 75 80 85 90 95 00 05 10 -20
Source: Bloomberg, AMP Capital -30
1991 1995 1999 2003 2007 2011
Fourth, while the US mortgage foreclosure rate remains high, Source: OECD, AMP Capital
the delinquency rate is slowing as are the number of new
The bottom line is that the US housing market appears to have
foreclosures, pointing to a decline in foreclosures ahead.
bottomed with recovery in both activity and prices likely.
Falling mortgage delinquencies point to falling foreclosures
What a recovery in US housing would mean?
10 A recovery in US housing has several implications.
9 > First, by reversing a signiﬁcant drag on the US economy
8 % Dwellings in 3
7 foreclosure (RHS)
it should help perpetuate economic recovery.
> Second, this is likely to be reinforced by a boost to US
1 household wealth as house prices stabilise and recover.
Delinquency rate, % (LHS)
3 0 > Third, residential construction is a key user of raw materials
98 99 00 01 02 03 04 05 06 07 08 09 10 11
Source: Mortgage Bankers Assoc of America, AMP Capital
like copper, therefore a recovery in US housing construction
should boost global commodity demand.
Finally, housing affordability has reached a record level. While this has
not been acted upon given the excess supply of housing and tough Concluding comments
economic conditions, we are likely to see greater demand for houses
as the excess supply dwindles and economic conditions improve. While the secular bear market in US shares that began 12 years
ago may have further to go, there are a number of positives
US housing affordability is at record high suggesting there is light at the end of the tunnel. In particular
200 the US housing sector appears to be bottoming.
Dr Shane Oliver
Head of Investment Strategy and Chief Economist
AMP Capital Investors
70 73 76 79 82 85 88 91 94 97 00 03 06 09 12
Source: Bloomberg, AMP Capital
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