29 Jan 2019
US Planning for Poverty
There is an old saying that commentators use to say “if the American economy catches a cold, then Australia gets the flu”. As China is now our largest export destination and along with Japan and Korea who are also major trading partners this saying is no longer true; however the US economy still makes up about 23% of the world GDP, so it is important to monitor US economic statistics. US inflation is low, wage growth minimal, unemployment at very low levels and although there is a trade war going on between the US and China, in time this will be resolved as its in both countries interest to do so. The current US corporate earnings season so far has revealed that the majority of companies are reporting earnings above forecast, and this is reflected in the partial recovery in the S&P 500 index since Christmas.
It does appear that US property prices have peaked. The US National Association of Realtors reported that in December, US existing-home sales (number not dollar amount) fell to 4.99 million, which is 10.3% below the equivalent period in 2017. Home sales dropped in every month in 2018, except February with the trend increasing in the final quarter of the year.
The US Federal Reserve’s, Credit Access Survey in October reported that mortgage applications fell to 6.7% from 9.2% over the previous year and the portion of respondents that experienced a mortgage application rejection increased to 19%. This trend is occurring in Australia because of tightening of bank lending standards and RBA monetary policy.
Consistent with these statistics at Wells Fargo, mortgage-banking income fell by 50%, to USD467 million, in the fourth quarter, while originations declined by 28%, to USD38 billion. JP Morgan suffered the same fate, as its mortgage income fell to USD203 million, a 46% drop from the same period last year while their originations fell by 30%, to USD17.2 billion.
At the same time as this decline, the fastest growing investment area in the US is REITs (Real Estate Investment Trusts) for Multi-Family Residences (US definition of an apartment block being built or renovated for rental purposes). At the Alternative Investment conference in Vegas in November 2018 it was reported that this area has grown by 2,900% over the previous 5 years.
Key statistics assist in understanding the growth in this sector:
9 million Americans lost their homes from foreclosure following the Global Financial Crisis. Most of these Americans have become permanent renters locked out of the home ownership market and joined the 19 million Americans that sold before foreclosure and many of whom also joined the rental market.
US home ownership is at a 50 year low of 62% with 119 million Americans living in apartments. As in Australia, property price growth has out stripped wage growth meaning that millennials and the lower socio-economic demographics (Hispanics and African American) cannot save the required deposit.
The median age of renters is 40 with an income of USD37,300 per annum and rental households are forecast to grow by 500,000 per annum from now to 2025.
There is a demand/supply imbalance even though an estimated 225,000 new units are delivered annually. At the same time 11.7million units need refurbishment.
So what does the above tell us? Firstly, the residential real estate sector is being driven by investors which from an economic growth perspective is more than compensating for fall in owner occupier activity. With interest rates forecast to rise further, it is likely the Federal Reserve will move very slowly, if at all in 2019 as US Government policy is to encourage and support home ownership. At a socio-economic level, the significant increase in investor activity in the multi-residence sector shows that America is planning for poverty. The American home ownership dream is alive and well, although the reality is that the US is becoming a nation of renters.