The latest NAHB survey provides the strongest signal yet that housing be will be a bigger contributor to growth heading into 2020. The NAHB survey has improved because monetary policy is not restrictive. The four rate hikes of 2018 were a problem, and the dip in the housing market index (HMI) from early 2018 onwards was a warning that the Fed was tightening too fast.
However, the Fed relented, and the HMI has turned back up. Housing matters: if the Fed gets it wrong, deflation in the real estate sector can make it harder for investors to absorb losses in other areas of the economy. The risk of a pullback in the more speculative areas would be higher.
Policymakers should not be so worried, therefore, about the fallout from WeWork’s ‘cash crunch’. The risks of a bankruptcy occurring should be reduced with lower interest rates: or if it does materialise, the restructuring will be less costly.
The biggest long-term risk to banks (in the real estate market) may prove to be climate change. For some investors, ‘long-term’ may mean that the risks are too far ahead to be discounted. The bankruptcy of PG&E in January this year is a reminder that cataclysmic climate events can, and will, have a more immediate impact. Climate-related lawsuits also pose a significant risk for companies.
At the same time, it is important not to lose sight of some very positive, structural changes. For example, the Northern Indiana Public Service Company (NIPSCO) is planning to replace coal-fired power stations with wind, solar and solar-plus-storage projects. The shift away from fossil fuels to cheaper sources of energy reflects a profound, secular trend, that will be positive for economic growth.
