US Macro: Lower US mortgage rates should support housing – National homebuilder confidence (the NAHB) rose in February to 62 from 58 in January, suggesting signs of a bottom in the housing market . Housing has been a notable weak spot in an otherwise very strong US economy over the past year. While we are still lacking Q4 data, the sector has likely made a negative contribution to 2018 GDP growth – for the first time since 2010. What has driven this weakness? There are two key factors constraining housing. First is the tight labour market. Following the subprime crisis, many construction workers left the sector and never returned; as a result, housing construction faces a chronic skills shortage, at a time when the broader labour market is already very tight. The second – and somewhat related – factor is affordability. The NAHB’s measure of affordability, the Housing Opportunity Index, is still much higher than in 2006-7, during the prior cyclical peak in housing. However, it has been on a steady decline since 2012, falling from a high of 78 to 56 as of the latest reading. This reflects both elevated house prices, but also the Fed’s tightening of monetary policy, which has pushed mortgage rates higher.
While labour is likely to remain a constraint on housing, we see scope for an easing in the affordability problem. First, the supply-demand imbalance appears to be lessening, with a clear turnaround in housing unit inventories over the past year, following years of declines. This should mean a further cooling in house price appreciation. Second, with the Fed now done with rate hikes (in our view), mortgage rates have also likely peaked. Indeed, mortgage rates have already fallen some 50bp over the past three months, from a peak of 5.2% in November to 4.7% in February. Combined with accelerating wage growth, solid jobs gains, and strong household balance sheets (household debt as a percentage of GDP fell to the lowest since 2003 in Q4), housing demand looks poised to recover this year. While a recovery in housing won’t be enough to prevent growth slowing in the US this year, which is being driven chiefly by the turn in the investment cycle, it should provide a cushion for the economy, allaying fears of a more pronounced slowdown. (Bill Diviney)
UK Politics: Party defections have few short-term implications, but potentially major long-term ones – In the latest political upheaval in the UK, three MPs from the ruling Conservative Party today defected to the newly-formed The Independent Group, which started only on Monday with seven (later eight) opposition Labour Party MPs. The Independent Group is not yet a political party and has no leader; however, Chuka Umunna MP has said the goal would be to have a party apparatus in place by the end of 2019. The defections have few near-term implications, as the MPs involved are small in number (so far) and their voting patterns are unlikely to change significantly.
However, this could be the start of a long-touted fundamental realignment in British politics – one to parties that are less defined by traditional left/right divisions, but more by how internationalist or nationalist they are (all 11 TIG MPs are very pro-Remain/europhile). Further defections appear likely, and opinion polling suggests an appetite among voters for a new centrist party. A poll conducted before the latest Conservative Party defections showed 14% of voters supported the group already – a significant number considering many voters would not have even heard of it (it was only publicly established on Monday). The UK’s first-past-the-post electoral system makes it hard for new parties to break through, as many vote tactically for one of the two main parties rather than for their most-preferred party. This has helped maintain the UK’s broadly two-party system until now. However, as the rapid rise of French President Macron’s En Marche! in France demonstrated in 2017, it is possible for a political unknown to come from relative obscurity and win an election in (what is also essentially) a first-past-the-post system. As such, The Independent Group could well turn into a significant political force in the future. (Bill Diviney)