'As Housing Goes, So Goes the Economy': OK, but Where Is Housing Going?

 | Jul 06, 2017 | 1:00 PM EDT
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The rise in the 10-year Treasury yield over the past few weeks again challenges knowledgeable market participants to confront and consider a functioning principle of the U.S. economy that's been in place since the New Deal era of the 1930s. 

What they must confront is that a rebound in secular economic activity has always been led by an increase in consumer confidence expressed as an increase in consumption, with the largest beneficiary being housing. 

This is the genesis of the guiding principle of "As housing goes, so goes the U.S. economy." 

What they must consider: Is it different this time? Can the U.S. economy enter a period of sustained growth that warrants an increase in interest rates and borrowing costs that is not prefaced by an increase in housing activity, even at the expense of such occurring? 

I've written about this issue every time the 10-year Treasury yield has risen beyond levels consistent with the logic of "as housing goes," since the Lehman-crisis era. 

There is no mathematical requirement that housing activity be the foundation of a sustained resurgence in economic activity, but it has been that way for decades and been recognized as such by government, finance and business leaders during that time. 

A principal part of government stimulus programs, because of this understanding, has traditionally and consistently been focused on stimulating housing activity and homeownership. 

Because of the residual overhang of the last housing crisis, those stimulus measures have largely been absent over the past decade, but no other sector of the economy has been targeted as a substitute for the economic benefit that comes from an increase in housing activity. 

What's troubling about this now, over a decade since the last crisis, and a period of very low growth that's become the norm, is that as obvious as this observation is, nobody in a position of leadership in the government or finance that I'm aware of, including fiscal and monetary policymakers, has explicitly expressed an understanding of this. 

The problem with that is that there is then no publicly identified problem that policymakers can collectively address. 

If the most knowledgeable leaders either can't or won't identify the problem(s) for all policymakers, then not only is no solution possible, but it raises the prospect that any actions taken compound the problems. 

That is, unfortunately, one of the issues the U.S. economy has been caught in since the last housing crisis. 

Every time the 10-year Treasury yield, and thus mortgage rates, begins to get down to levels where homebuyers' fear can likely be overcome by greed, something causes the yields and borrowing costs to jump back up, which prevents the consumer-driven catalyst for the creation of a virtuous cycle of economic activity from taking hold. 

Further, as I've written in numerous previous columns, is that it appears that "truth" concerning economic activity has been superseded by the belief that a created narrative concerning economic activity is a better way of affecting consumer attitudes, confidence and actual spending. 

I understand that this sounds Orwellian, but it is not something I've newly arrived at or without great consideration. 

The massaging of economic data with subjective inputs has increased dramatically over the past generation. Seasonally adjusted first-quarter GDP estimates, the GDP deflator issue, the Bureau of Labor Statistics' employment figures not matching the Treasury's payroll tax receipt data, and other issues I've written about over the past several years are examples of this migration away from data collection, interpretation and general "truth seeking" with respect to the real state of the economy, and toward data creation and narrative making. 

This need not be nefarious, though. 

The ability to easily manipulate data afforded by technology, combined with the human tendency to want to deliver and receive "good" news, may simply be skewing data toward what we want it to be rather than what it is. 

Whether this is being done consciously, though, is irrelevant with respect to the real impact on the economy.

If policymakers are making decisions using corrupted data, the overwhelming probability is that those actions will prove to be pro-cyclical, not countercyclical. 

The point of all this discussion, as it has been every time I've discussed it in response to a pop in long-end Treasury yields and mortgage rates, is that this is again a temporary situation. 

The rise in yields/rates slows housing activity, which causes real economic activity, whether properly measured by government reports, to decrease and sets the stage for yields and rates to decline again. 

I continue to believe that yields and borrowing costs must and will come down dramatically and are required for a resurgence in housing activity to be strong enough to catalyze the start of a virtuous economic cycle.

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