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 “quantitative easing” – 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.