Zombie Households

by Annaly Capital Management

Thursday’s third quarter GDP release provides a ton of fodder for the data dorks among us. There will be more to follow on this in the October monthly commentary, but today we’ll look at just one of the stand-out drivers of GDP in Q3: private residential investment. The chart below shows its astounding rebound, which added a full 0.53% to the 3.5% GDP number.


The percentage change becomes less impressive when viewed in the context of the dollar level of activity, but it also starts to look like the beginning stages of a typical recovery in housing. Compare the current reading to the previous bust in the late 1980s and subsequent boom that began in 1991. Are we in store for a similar road back to “normal”?

How comparable are the two situations, the early 1990s and the late 2000s? What happened in 1991 to help put in a bottom? First, mortgage rates came down from over 10% in 1990 to 7% by 1993. Second, household debt as a percentage of GDP was 60% in 1990. The ratio of household liabilities to disposable personal income was 85%. The respective levels of these metrics are now 95% and 130%, each at or very near all-time records of indebtedness. The tailwinds for the housing market were substantial in the early part of the previous decade: interest rates were coming down and borrowers had room to expand their debt loads. The official response during this crisis has been an attempt to artificially engineer the same tailwinds that existed naturally before. The Federal Reserve has purchased around $977 billion of agency MBS in an attempt to bring mortgage rates lower (despite already historically low rates). Tax credits have been created and expanded to incent already heavily-indebted households to take on more debt. So far, it’s worked!


We’ll close with a great quote from James Aitken, of Aitken Advisors, that sums up the situation perfectly:

“The primary difference between Japan and the United States at this point of their respective monetary malaises is that whereas Japan created a nation of zombie corporations, the United States is creating a nation of zombie households.”

  1. jimh009 says

    While I think it’s rather obvious that we aren’t in store for a repeat of 1991 or 2000 in the recovery of housing for the reasons, and many others, stated in this article, it seems a bit distorted to use “Existing Home Sales” as a benchmark for a recovery in the housing sector. The key to a recovery in housing is “New Home Sales,” as “existing home sales” really don’t help the housing sector.

    As an example, I’ll use myself. Due to the crash in home prices, people like me have been able to (finally) afford to be able to buy a home. Yet, when I moved – I left behind a “empty rental unit” behind. And the person I bought the place from went from “owning” to “renting.” In effect, we simply swapped places.

    Yes, existing home sales are important as the massive inventory of existing homes needs to be absorbed. But to use existing home sales as a benchmark for an expansion in the housing sector I think is using the wrong benchmark. Until new home sales (and thus, new home construction) begin to show some life, the housing sector will remain in the doldrums.

  2. Roland Berie says

    pardon my ignorance, but what is private residential investment?

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