Wednesday, January 21, 2015

Housing continues to improve

December housing starts beat expectations (1089K vs. 1040K), but not by much, considering how volatile this series normally is, and how important seasonal adjustment factors can be. Missing from the headlines were upward revisions to the past two months. Pessimists will note that the level of starts in November 2013 was slightly higher than the latest reading, suggesting that starts have been relatively flat for the past year. I prefer to look at a 12-month moving average of starts: that shows starts last year were 8% higher than in 2013. That's pretty decent growth. Plus, as the chart above shows, the level of builder sentiment suggests conditions are likely to continue to improve, if only modestly.

From a long term perspective, housing starts today are still miserably low. That's depressing on its face, but the optimist in me sees the tremendous upside potential should underlying conditions continue to improve. Why couldn't housing starts double over the next 5 years or so?

Untapped potential is the story of the overall economy as well, as the chart above shows. The economy is currently about 10% or so below its long-term potential trend. If policymakers move in a growth-friendly direction (e.g., eschewing tax hikes, reducing regulatory burdens, simplifying the tax codes, lowering marginal rates, eliminating deductions and subsidies, lowering corporate tax rates) we could be on the cusp of some significant growth in the years to come.

It makes more sense to focus on what could happen if things go right, than to lament how many things have gone wrong.

UPDATE: The chart below shows an index of new mortgage originations (not refis). At the end of last year it had reached a multi-year low, reinforcing the widespread belief at the time that the housing market was running on fumes. But in the past three weeks, new mortgage initiations have jumped over 25%. (Caveat: this is a seasonally adjusted index, and this is the time of the year when activity is typically slow, so the adjustment factors are large and could easily be wrong.) We'll have to watch for further strength, but in the meantime this fits nicely with the noticeable pickup in bank lending in recent months that I noted yesterday.


Benjamin Cole said...

Excellent blogging.
I suggest cuts in FICA taxes would be the best growth policy now.
Imagine a guy wants to work and someone pays him---and the federal government slaps a 15.2% tax on first penny paid and then up to $100k or so. I like the idea of exempting first $20k in wages from FICA offset by QE contributions to SS trust fund.
A nice deal would be to eliminate corporate income taxes offset by a $300 billion cut in "national security" outlays.
However...the talk is of large increases in federal spending...

Matthew Grech said...

Benjamin: Both of your recommendations are excellent! Why is nobody even discussing a cut in the taxes related to payrolls? This is a huge source of revenue ($1T per year) and it's regressive in nature (so it's plausible to pass something). It would make total taxation even more progressive (ugh) but, hey, life ain't perfect.

As for the prospect of the Republican Congress reducing the size of government, the optimist in me says to stay hopeful. The realist says to internalize the following article from the great Lawrence Vance:

William McKibbin said...

A two-year income tax moratorium on personal income up to $300,000, accompanied by an "instant" 40% across the board cut in government spending and salaries is what we need right now!

William McKibbin said...

We need to cut government salaries by 40% in order to incentive existing government workers to seek jobs in the private sector -- only uniformed employees should be retained as government employees -- elected officials should serve as volunteers with no salaries whatsoever -- we need to get serious about creating a government that more closely resembles the Salvation Army rather than landed gentry.

Hans said...

According to this website, the US economy has been under performing since 1990.