Economic Update – Fall 2019 Edition
The US Economy – Safe as Houses
In the movie Sherlock Holmes: A Game of Shadows, the evil Professor Moriarty sends some thugs to kill John Watson and his new bride Mary as they travel by train en route to their honeymoon. While the train speeds over a bridge, Sherlock Holmes surprisingly throws Mary out of a train door down into the ravine below. Watson is perplexed.
“Did you just kill my new wife!?”
“Of course not!” Sherlock replies
“How do you know that when you just threw her off a train!?”
“I timed it perfectly… Don’t worry old boy, she’s as safe as houses!”
The phrase ‘safe as houses’ originated in England around the 1840s as a way to say that something is completely safe – without risk. It is believed to have come about due to the railway mania that caused havoc on the English economy. Speculators who poured money into railroad stocks went bankrupt, while those who remained invested in the housing market survived with fortunes intact. Thereafter, housing was seen as a conservative and secure investment.
The financial crisis of 2008 likely ended any misconceptions that housing is without risk. The phrase is now, more often than not, used in an ironical or sarcastic fashion. Even in the Sherlock Holmes example, what makes the line funny is that while it is intended sincerely, Sherlock did just throw a woman from a speeding train a hundred feet to the water below. Perfect timing or not, it is more than a stretch to say that Mary would be “completely safe – without risk”.
Applying this concept to our current state of affairs, the US economy is the safest house on a global block that has some challenges. Furthermore, I think it is appropriate to say our economy is ‘safe as houses’ in the sense that I believe with global growth still so weak, there will need to be a domestic source of growth to keep us running. That most likely source is our housing market. That is to say, our economy will be as safe as our housing market – for better or worse.
There are a couple of reasons why the housing market could help ignite a second round of growth in the year 2020 and beyond.
First, low-interest rates have continued to drive debt service payments down for many families…
… while their net-worth is continuing to rise.
And while consumers are finally starting to invest more in their houses, by both buying and remodeling, it is still well below the long-term average.
And home building has been very slow to recover in the last 10 years as Housing Starts has not even gotten back to the last cycle lows of 2002.
It is important to remember that not only is residential investment (home building and remodeling) a great economic growth activity in itself, but it also has a tremendous multiplier effect on the economy. Homebuilders buy tools and trucks, homeowners buy furniture and appliances, and when more homes are built, home prices go up, and people feel wealthier and more confident to spend.
For example, my wife and I bought a house in early 2018 and we have more projects to do than we can hope to get done in 10 years… just about the time all the projects would need to get done again! We have bought couches, redone the deck, replaced the hot water heater, and bought new light fixtures, just to name a few examples. Most homeowners can relate. The question for the US economy is, will there be more of us out there next year compared to this year? The current economic environment suggests that this could be the case.
What are the risk factors that could inhibit growth in residential investment? If global growth stagnates enough, that could impact enough jobs, and slow income growth enough to deter people from buying new homes. If a middle manager at Caterpillar gets laid off because Brazil isn’t buying as much construction equipment, they will not be as likely to be out shopping for houses.
And the biggest headwind for housing over the course of the next 10 years is people – or lack thereof. Not enough people are joining the labor force, getting jobs, and therefore there will not be as many potential home buyers out there.
I could write another entire post on the root causes of why we are seeing this dramatic slowing (and shrinking) of the working population but a leading contender is simply that couples are getting married later and having fewer children. Immigration was picking up the slack for a time, but even that has slowed somewhat.
The bottom line is that while housing could provide the fuel to keep this economic expansion going, there is no guarantee that it will. On the plus side, we have an economic environment that is supportive and has the capacity for growth. Consumers have higher net-worth, higher wages, lower debt burdens, and can get mortgages at historically low rates. On the flip side, we have election-year uncertainty, slowing global growth, and the ongoing trade dispute with China to contend with. We will continue to watch all of those developments closely.
One thing we can say confidently about the future is that it will have some surprises in store.
That forecast is safe as houses.
As always, please contact one of our Trust professionals if you have any questions.
Keith J. Akre, CFA, CFP® – Trust Officer
Opinions expressed are solely my own and do not express the views or opinions of Stillman Bank. Investments available through Stillman Trust & Wealth Management (1) are not FDIC insured (2) are not deposits, obligations, or guaranteed by the bank and (3) are subject to investment risk including possible loss of principal.