Some economists are warning that the slowing housing market might bring on a recession or at least slow down growth too much. We need to look at the whole picture.
There are all sorts of things that may concern us about the economy, and by extension, the health of the stock market and our investments. One of the things that is now worrying people, including some economists, is that the rate of growth with the housing market is slowing down.
All things being equal, this would serve to exert a downward force on GDP growth. Since this anticipated further slowdown is on a global scale, the worry extends to global GDP growth declining.
In today’s modern economies, we’re all affected by changes in global GDP growth, especially with owning shares in large American companies whose reach is global. The way that American tech stocks backed off due to reduced sales in China illustrates just how connected economies are, and they are very connected indeed.
We spend a lot of time looking at our own GDP forecasts, and while there’s no doubt that domestic GDP growth rates matter the most, we also need to keep an eye on global numbers or numbers from another significant country like China to get the full picture of what is going on and allow us to forecast trends better.
The current numbers are what they are, and it doesn’t take any skill or foresight to interpret them, as we just look at the present situation and compare it with past periods to get a feel for the way things may be trending. It’s important to realize that we need to use the word “may” here as these are predictions and trends do end and reverse, and just because things are going one way now doesn’t mean that they will continue to.
This is similar to how we might play a stock, where if it is going up or down we may be able to say that it is more probable to continue in that direction for a while, but we still need to closely monitor things to ensure that this does continue and our outlook and predictions remain valid. With each passing day, week, and month, we have new information to work with and we really need to account for this new information properly in our assessments to ensure that we remain up to date and are kept in the best position to decide.
Predicting economic growth is more complicated than that though, as economists rely on a lot of data to arrive at their predictions, but trends do matter as well. The reason why we want to put more weight on the current trend is that, like an object in motion, the momentum that it is under does need to be offset by some opposing force to change its speed or course.
We know that economic forces do have momentum like stocks do, as a change in one condition can produce changes in another. With stocks, they can be moving up because people see them moving up and want to buy them, or if they are going down, they may see this and want to get out now before the price goes down even more.
The Housing Market Declining Can Matter If It Really Declines
With economic factors, we might see the value of the new home market declining, and this can bring down people’s income, eliminate some jobs, and this all can lead to even less people buying homes due to the loss of capacity this creates. There is therefore a circular relationship here and we want to make sure that we account for these effects by way of looking at trends as well as everything else we may look at.
When we see the housing market growth trending down, which doesn’t mean declining, it just means that it is growing at a lesser rate than before, we might think that this in itself may add to all the other downward pressures on the economy that are already present.
The problem with this view is that this is only true if all other things are equal, and life is usually not that simple. We can’t really look at a sector in isolation here and think that it will affect the economy such that we may see a proportional decrease in growth, because there are so many other things involved.
A good example would be if and when the trade war with China ends, which would certainly lessen trade restrictions and create more economic expansion. The housing market would be helped by this to some degree, but it’s how this would affect the big picture, U.S. GDP growth or global GDP growth that really matters.
Researchers at Oxford Economists just released a report which concludes that “a combined slump in house prices and housing investment could cut world growth to a 10-year low of 2.2% in 2020, and to below 2% if it also created a tightening in global credit conditions.”
Considering that global GDP growth was 3.6% last year, that’s a long way to fall from what is essentially a pretty modest decline in growth in a sector that has a pretty modest share of the global economy.
Once again though, we can’t make the mistake of just extrapolating changes in a certain sector to the whole economy, and we know that the housing market can decline and overall economic growth can increase, in spite of any correlations.
To the extent that these things are indeed correlated, we would need to see similar things happening to the same extent in other sectors to confirm this. The shortcut to all this is to just compile everything and see how it comes out.
Big Deviations from Consensus Forecasts Need a Lot Behind Them
The prediction for global GDP growth for 2019 is currently at 3.3% according to the IMF, which is still a long way from 2.2% and would require a drop off almost 4 times the decline that 2019 is expected to bring. If we only expected to give back 0.3% during these tumultuous times with all these tariffs flying around, it’s hard to imagine what could bump this up to another 1.1% decline the following year.
The IMF is calling for a 0.3% increase in GDP in 2020 though, not a decrease. They do look at the housing market in addition to all other factors that need to be looked at. Also, the U.S. Federal Reserve is planning on hiking rates in 2020 due to their expectation of the U.S. economy growing a little too fast for their liking, and while the growth we expect in 2020 will still be pretty modest, this is not shaping up to be a year where we’ll take a plunge like Oxford Economics believes.
It is, of course, possible that Oxford Economics may be right with this and the IMF and the Fed as well as a lot of others might be wrong, but for the housing market to cause such a tumble would take a very big event indeed, and even something that we may even call a collapse might not even qualify.
No one is expecting that, and even Oxford Economics believes that the housing market will continue to grow, albeit at a slower pace, but doing so would not really have much of an effect upon the global economy. There are indeed some residual effects from this slowdown but nothing close to the magnitude required to have GDP growth 1.4% lower than current forecasts.
The fact that housing prices appears to be central to their view is an interesting one, because housing prices aren’t part of GDP and are only tangentially related to it. Housing prices going down does have an effect, but the total amount less spent with situations such as we have today simply is not that noteworthy.
The real effect of housing prices not increasing as fast, and especially going down if we get there, is that it limits people’s ability to borrow against their equity, and this type of credit does have a real effect upon money supply. The money supply going up is what drives expansion, and this is why central banks hold the keys to the economic kingdom because they oversee money supply, and money here means credit essentially.
As long as this is increasing, we know that there will be more and more to borrow as housing prices keep going up. If housing prices go down, now we have a problem, and the more they go down, the bigger the problem. Going up more slowly isn’t part of this conversation though, and this is not the sort of thing that brings on credit crunches.
We certainly do not want to equate the present situation with the housing crisis of 2007 or anything close to that, because we simply do not have anything going on now that remotely resembles it, and not even one that is even peeking in the red, let alone below it enough to cause a significant decline in global GDP.
The report remarks that “downturns in world housing markets have been contributing factors to global recessions over the last 30 years, more dramatically in 2007-2009. As a result, the current slowdown in global housing is a cause for concern.”
The obvious problem with this argument is that we are not even comparing two different things. The downturns that have led to global recessions have been real downturns, and big ones, especially the 2007-2009 one. A slowdown in growth is simply in an entirely different category, like the one we are seeing now.
The only way that their view could be right is if they are seeing some pretty major things that others aren’t. There might be a little of this going on, but it is just not plausible that what they may be seeing that others don’t could produce such a drastic difference or anything close.
Otherwise, we can do all sorts of fun things with numbers, as these sorts of conclusions are dependent on the assumptions we make when we construct our models. If we’re looking at big drops in home values and comparing it to now though, we’ve made a huge mistake right there, and we can only wonder what others may have been made.
Ultimately, investors are wiser to pay attention to those who we can be assured are looking at the whole picture, and it’s only when the consensus turns that we should become concerned. This is not the case right now though. Forward thinking can be great, but only when it is aimed in the right direction at the right things. When it comes out looking like it doesn’t make much sense, it usually doesn’t.