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.”