In the roughly 30 years that I've closely followed financial
markets -- the last few years in my role as Chief Investment
Officer of Fundamental Fixed Income at BlackRock -- one of the
most important lessons I've learned is that markets generally can
only concentrate on no more than a couple of things at a time.
With that lesson in mind, I'd like to focus here on one of the
vital things on the mind of the market now - one that also
happens to be a pillar of growth that can help make or break the
US economic recovery: housing.
First, a quick show of my hand: I think the US economy is in
the process of emerging from significant structural headwinds,
thanks to consumers and corporations strengthening their
financial positions. And consumer finances should improve even
more as housing recovers further - a virtuous cycle that matters
a great deal for policy and investments.
Now the backstory that I believe gets us to that vision.
As you've no doubt heard ad nauseum from the financial media,
the Federal Reserve's QE, or "
" - essentially, central bank purchasing of US Treasury and
mortgage-backed debt through the expansion of its balance sheet
-- has strongly supported prices of financial assets over the
past couple of years. Indeed, from the first quarter of 2008 to
2013, the vast majority of net worth gains (near 90%) stemmed
from increasing financial asset prices, according to Royal Bank
of Scotland research. Good news -- provided you were fortunate
enough to own stocks and other such assets.
But more recently QE has had a more democratized wealth impact
as mortgage debt levels are falling and the value of residential
homes is finally showing meaningful improvement, in part due to
the Fed support. The upshot is that many middle-income households
- not just those in the financial markets - are finally
participating in these gains (see Figure 1).
Another encouraging sign is that home prices are historically
affordable, despite the recent spike in mortgage rates. Further,
consumer expectations and purchase survey data suggest that many
potential buyers may move sooner rather than later. All good:
More real estate transactions may feed through to further
construction activity and increased growth.
Also, while the labor market recovery has been painfully slow
and uneven; there are areas of improvement that may be positive
for housing. For example, recent upward revisions in non-farm
payroll numbers have meaningfully strengthened the average pace
of jobs growth this year, despite a recent slowing in the metric.
Moreover, outside the sectors I've deemed structurally impaired
(construction, financial services and government), job gains have
generally been on par with past cycles.
The point here is that housing is critical to broader economic
recovery - in fact, the connection between houses and jobs alone
is critical, as Figure 2 suggests.
Put it altogether, and you have to believe - I believe - that
the Fed will do the right thing and keep interest rates "highly
accommodative" for a considerable period of time, even as the
central bank considers tapering its quantitative easing program.
Such a monetary policy would help maintain affordable mortgage
rates and could even counter the possible negative impact of
other factors that could curtail loan growth, such as new and
increased bank regulation.
So, while it may be easy to make a pessimistic medium-term
case for the US economy in the wake of financial crisis and
painful recession (alongside myriad risks still plaguing the
globe), such a case doesn't adequately account for several
positives in our economic trajectory - housing being one of the
key positives among them.
Now, some of you may be thinking: OK, but what about those
financial assets he mentioned - where are those headed? In my
next post I'll talk about how economic growth and policy could
affect asset class returns for the rest of the year. I look
forward to continuing our conversation.