Jason Stipp: I'm Jason Stipp for Morningstar. Investors hoping that a big pickup in housing will boost 2014 GDP may want to check their numbers. Morningstar's Bob Johnson, our director of economic analysis is here to explain why.
Thanks for joining me, Bob.
Bob Johnson: Great to be here today.
Stipp: We have spoken before about expectations for 2014 GDP. There is a lot of optimism, at least in some corners, among economists. And housing might be one of the factors that's bolstering their case--some might be expecting housing to accelerate. But when you look at the data soberly, you really aren't seeing acceleration. In fact you are seeing [growth] deceleration in a lot of the housing stats.
Johnson: Exactly. Last week we got the starts and permits data from the Census Bureau, and when you look at those numbers, both starts and permits, in December 2012, they were something in the 34% range. So, pretty strong year-over-year growth on my [three-month] averaged basis.
In December 2013, we dipped back to 9%- 12% growth. So that's a really dramatic change and a dramatic slowing in the growth rate. And the fact that some of it's in the permits category, which tends to presage things that will happen in the starts market a little later, it's really probably going to continue at least for a few more months at relatively soft levels. So I'm concerned when people say that housing is going to be a big contributor and is catching. I say no, not really.
Stipp: We are still seeing growth, but not the kind of growth rates on a year-over-year basis that we were seeing in December 2012?
Johnson: Exactly.
Stipp: Also existing home sales aren't going to give a big boost in 2014. Based on where they were in 2013, we'll probably see flat growth there.
Johnson: Yes. That's a very interesting statistic. I always say pay more attention to new home sales and starts and permits, and you don't pay as much attention [to existing home sales]. But last year we had a huge expansion in existing home sales, not only in the number of units but also in the price of those units, which drove up brokerage commissions, which run about 6% to 8% of a home sale. And those do get included in GDP and were a big help.
Now as we go into 2014, the National Association of Realtors, which one might expect would be relatively optimistic, are saying the best case is a flat year. And part of that is because in 2013, existing home sales got a big boost as interest rates started to accelerate, and everybody who had been sitting on the fence jumped off and said, I need my home now. That caused an artificial boost in 2013. We are not going to get that in 2014.
Stipp: Something else that investors should keep a close eye on with respect to housing is the types of new housing starts that we are seeing. It's not all those single-family homes. There are also other types of starts that could have an impact on the economy.
Johnson: There has been an absolutely massive change there, based on what usually happens. Apartment buildings and multifamily homes are actually almost back to pre-recession levels, but single-family homes are still running about one-third of what they were at the last peak. So the single-family market has been much slower to recover. I think that's one of the interesting and different phenomena we have seen this time around.
Stipp: What does that mean for the economy if we're seeing more multifamily or apartment buildings accounting for more of the starts, and single-family is still lagging based on where it was before?
Johnson: I think there are a few things going on there. Certainly demographics isn't helping. As the baby boomers age and sell their home in the suburbs and move downtown, and also as young people stay in apartments longer, I think you've got both ends of the age spectrum driving the multifamily market more than the single-family market, which has been very soft.
Stipp: And from an economic perspective, do you think that we are not getting as much economic activity if we are building more multifamily versus single-family?
Johnson: I think you are more efficient when you build a large building. … A small builder can't do a large multifamily project. So that [activity], which was the bread-and-butter of the recovery in housing the last time around, really isn't there this time. In fact it's very difficult to get financing for single-family home developments right now, but it's relatively easy to get financing for a multifamily structure because institutional investors who need to put a lot of money to work at once are willing to invest in apartment buildings, but less so [for a] small [development of] single-family homes. The tremendous boost that we have seen so far in housing improvement has come almost entirely on the multifamily side.
Stipp: But we are seeing multifamily now, as you said, reaching similar levels that we were at before the recession. So, we might not see a lot more growth from that part of the housing starts going forward.
Johnson: Exactly.
Stipp: So what does this mean for your 2014 GDP expectations, if you're going to assume that you will temper some of your expectations for housing?
Johnson: A lot of people are saying, if the economy ends up growing 3% or 2.5% in 2013, something in that range, then we should certainly grow a lot faster in 2014, because now we are not going to have the government fiscal drag.
But on the other hand, I want to point out that housing has been a key driver, and we have just gone through the case that it's going to be considerably slower growth and a much smaller contributor in 2014 than it was in 2013.
And I have already talked in separate videos about the auto industry really building up inventories, probably more than perhaps they should have, and that autos aren't going to be as big a contributor as they have been in past years, either.
And then maybe layer on [the possibility that] we are getting close to some type of capacity constraint on shipping oil and gas products outside the country--maybe the big boost from oil and gas production begins to end a little bit.
So, for those reasons I don't think we are going to get that 3.5% to 4% growth that some are talking about; in fact 3% may even be a stretch. I'm sticking with my 2% to 2.5% [forecast] for the year.
Stipp: Bottom line, given the slowing growth that we are seeing in the housing metrics, and multifamily homes probably getting close to peaking out, we should definitely temper our expectations for 2014 GDP. Don't bank on a big housing boom to push us much above that 2.5% rate that you are expecting.
Johnson: Exactly.
Stipp: Bob, thanks for joining us.
Johnson: Thank you.
Stipp: For Morningstar I'm Jason Stipp. Thanks for watching.
