What the ‘Long Boom’ in US Housing Means for Australia

What the ‘Long Boom’ in US Housing Means for Australia

If you’ve seen my articles in the Daily Reckoning Australia lately you’ll know I’m extremely bullish for the stock market over the next 18 months.

In fact, I’m very positive on the outlook for both US and Australia stock markets…and the global economy in general.

There’s a big reason for this: the US housing market.

I can guarantee you hear a lot about what US stocks and interest rates do on the nightly news, but rarely anything about this.

Let me say, the US real estate market trumps both.

It’s the largest asset class in the world by far. It also underpins the middle class wealth of the US consumer. The majority of bank lending in the US is mortgages.

What happens here matters.

Property is booming in California, New York and other money and technology based cities in the US attracting high investment and paying high wages.

I bring this up now because there’s been some important developments here.

Two big players in the USA housing scene are two semi-government institutions called Fannie Mae and Freddie Mac. Their mandate is to promote home ownership.

Fannie and Freddie don’t originate loans like a bank. But they purchase mortgages from lenders and then securitise them for investors. Like a bank, however, they have certain standards for the loans they’ll buy.

Those standards are dropping. And the same appears to be true for US bank mortgage lending as well.

There’s a credit expansion
coming to America

This is very important.

You see, after the 2008 crisis, the regulators came down hard on the financial system to prevent the wild excesses of the housing boom from happening again….

That meant borrowers needed high deposits (20%), strong credit scores and solid employment history.

That’s shut a lot of people out of the housing market­ and kept them out of the boom that’s happened in many places since 2011.

But slowly these barriers are being chipped away.

Fannie and Freddie, under certain programs, have for a while accepted loans with as little as 3% down.

They’re now partnering with big US mortgage lenders like Wells Fargo, JP Morgan Chase and Bank of America for these type of loans to get more Americans into home ownership.

Fannie and Freddie support means the big US banks will be happier to make these loans, because they have a willing buyer to sell them too.

Fannie and Freddie are also loosening the debt-to-income ratios that prospective borrowers are allowed to carry as a percentage of their gross income.

This makes it easier for people to get a loan.

There are other some other big trends playing out here as well…

There is a huge 3 million pool of first home buyers in the US looking to get into the market.

In fact, US home ownership hit its lowest level in 51 years in in 2016.

President Trump has made no secret that he wants banks to help Americans get into the housing market. It’s an easy win for him politically. I expect everything will be done to make this ownership rate go higher.

America’s healthy economy (and very low unemployment rate) means that credit scores are at a record high in the US and risky borrowers at a low. This means more Americans can pass this particular lending criteria.

I also expect US real estate prices to keep going higher.

Even though it’s seen a prodigious recovery in many areas, if we adjust for inflation, US houses remain nearly 15% below their all time high.

The Harvard ‘State of the Nations Housing 2017’ report says low construction and tight lending are still ‘serious constraints’ for potential homebuyers. US new family home construction is still well down from it previous peaks.

This is all mixing in ingredients for a long period of strength here. Boral Chief Mike Kane said in 2016 he sees a 10 to 12 year recovery ahead.

I don’t doubt it. Here’s another reason why…

The “Golden Ratio” underpinning the USA

There’s also a demographic “X” factor that my colleague Teeka Tiwari has done significant research on.

He calls it the “Golden Ratio”.

This is the ratio of middle aged people to young people within the overall demographic pie.

Specifically, Teeka says, the Golden Ratio shines when the 35 to 49 year old demographic becomes larger than the 20 to 34 year old demographic.

When the older bracket grows larger than the younger, we have the set up for a period of massive wealth creation.

This is easiest to see in the stock market at first. The dynamic behind this is people aged between 35 and 49 are in their peak earnings years.

This is when they buying houses, cars and having kids. This drives corporate profits higher. Academics have confirmed this demographic correlation with US stocks.

For example, this ratio went “golden” in US history in 1949 and ran to 1966.

The secular bull market in US stocks took the Dow up on average 10.6% a year over this time.

The Golden Ratio happened again in 1982 until 2000. The Dow averaged 15% annual gains. It was the biggest bull market in US history.

That’s all in the record books now.

Here’s why we care. Teeka says the ratio recently turned golden again — in 2015.

This latest Golden Ratio is not due to subside until 2028.

120 million Americans are due to transition into their peak earning years and into the Golden Ratio range from 2015 to 2028.

If history repeats, US stocks could go into their most exciting and wealth creating period ever.

That doesn’t mean there won’t be big rallies and dips along the way. But the idea that America is going into some sort of terminal decline is bogus.

The US has enormous tailwinds behind it. And these winds will blow into the Australian market too.

But they will begin in a strong US housing market, which we’ll be tracking.

I expect all this to be very good for US banks.

The ‘hidden’ credit stimulus

You no doubt have read about the US Federal Reserve withdrawing its ‘stimulus’ program. The Fed is no longer going to reinvest all its holdings of US Treasuries and mortgage backed bonds. Many in the market and media worry this will derail the US recovery.

I do not agree. In fact, I firmly believe the Fed is doing this in the full knowledge there’s a credit expansion coming from the US banks.

Just as the Fed withdraws, the US banks will expand. This will keep the US economy from deflating in a serious way.

This is what everyone misses. They only watch the Fed. However, there are two sources of credit stimulus in any economy. One is the central bank. The other is the commercial banks.

This I expect to expand over the next few years as low unemployment and lower credit standards let more Americans on to the housing ladder.

Don’t let the doomers or market volatility derail you from seeing all the opportunities that spring from this insight.

Why is this important for us?

I see a switch in investor behavior coming where people stop worrying about the downside and start rushing in to make money in shares.

If the US market really heats up, Aussie stocks will follow. The more “boom time” psychology that comes into the market, the more chance we have of stocks really firing.

History shows stocks can reach crazy valuations when the stock market really runs.

That’s when we’ll be looking to cash in our gains that we’re looking to build now.

As I keep saying, the world is getting better, and the best way I know how to take advantage of it is here.


Callum Newman Signature

Callum Newman
Editor, The Daily Reckoning Australia