Mortgage Debt-to-GDP Ratio Will Start Turning North by Kendall Baer

Mortgage debt’s share of total GDP, from 1951-2009, experienced frequent growth, interspersed with a few periods of plateau or decline, according to a report from Matthew Schreck, Quantitative Research Analyst for Ten-X.

Schreck says the rapid appreciation in home prices throughout the 2000s, culminating in the housing bubble peak and resultant bust in 2009, is illustrated by mortgage debt-to-GDP’s run-up to a peak of 0.73 in the first quarter of 2009. Consequently, the ratio has been on a steep decline ever since the bubble burst. The good news is decline has been slowing down in recent quarters and in the first quarter of 2016, the ratio measured 0.52. According to Ten-X, this suggests the ratio is finally flattening out and decline may be in the past.

The housing market in Schreck’s opinion is one of the few remaining pieces of the US economy that has significant slack remaining, and a large area for growth.

“Construction employment growth is still trending below prior expansionary paces, lending conditions remain tight for now, and the young ‘millennial’ generation will need more and more housing as it ages,” says Schreck. “As lending conditions ease, the need for more housing drives stronger construction trends, and household formations rise as the younger generation comes of age, mortgage debt-to-GDP will start turning north, and housing will once again capture a bigger portion of the overall economy.”

Median existing-home prices for the US are up 6.2 percent for year-over-year as of the first quarter, according to a report from the National Association of Realtors, but they have only recently reached a new highest peak. Schreck says this data suggests there is further room to go. Additionally, home sales remain severely constrained from primarily tight for-sale inventory conditions making the market prepared to pick up in the near future.

Despite recent concern regarding softness in the US economic expansion, Ten-X believes the foundation remains solid due to wage growth is at a cyclical peak, retail sales growth depicting a strong consumer, and housing shows the potential for a breakout.

 

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