The outlook for house prices is dimming, and one unexpected casualty may be new jobs at start-ups.
House price gains are coming off the boil, having already strongly outpaced income growth over the past two years as they bounced off of post-crisis lows. CoreLogic data for May, the most recent available, shows an annualised gain of 8.8 per cent, chunky but well below the 11.8 per cent recorded in February.
And while many expected a job recovery to drive housing, it may in fact have been exactly the opposite.
Home price gains may play a key role in helping create jobs at start-up firms, according to economists at the Federal Reserve Bank of San Francisco. And with start-ups typically accounting for about half the jobs created during recoveries, that makes house price appreciation much more economically important than many have previously believed.
One of the puzzles of the lukewarm recovery is why job generation at start-ups, usually a key source coming out of a recession, has been so poor. Employment growth at new companies suffered a worse decline than both their larger peers and compared to start-ups during and after previous recessions. Job creation at start-ups in the year to March 2011 was about 760,000 less than previous experience would have suggested, according to the San Francisco Fed.
One culprit was declining house prices, with a clear correlation at the state level between job creation at new companies and house price declines.
“Lower house prices reduce homeowners’ equity and wealth, which can restrict an important source of funding that entrepreneurs typically access to start new businesses,” economists Liz Laderman and Sylvain Leduc write in the July economic letter from the San Francisco Fed.
“Lower home equity constrains the availability of home equity loans to fund start-ups. In addition, even entrepreneurs who use assets other than their home equity to start a new business may be less willing to take that risk if they don’t have enough home value as a backstop to their investment.”
Laderman and Leduc theorise that rebounding house prices from 2012 on may have provided a tailwind to job creation at start-ups, though the data is not yet available.
A new stasis?
If so, that may be about to change.
With asking prices rising by more than wages in 95 of the 100 largest metro areas, according to Trulia, a slowdown seems inevitable. And while capital still flows from investors into single-family housing, that business model still faces long-term hurdles.
Bond strategists Chris Flanagan and Gregory Fitter of Bank of America Merrill Lynch see sharply slowing house price gains followed by a long period of stasis.
Their valuation model, tied to the Case-Shiller index, sees annualised gains of just 3 per cent a year over the next two years, followed by six (yes six!) years of essentially no price appreciation at all.
“The post-crisis boom period for home price growth of the past two years is most likely over,” Flanagan and Fitter write in a report to clients.
“The exceptionally low home price growth period of the future, where prices are expected to grow at a 1 per cent annualised rate for the next eight years, most likely has started.”
That is an out-of-consensus forecast, but if true, will raise some real issues for job growth.
In one respect a long period of little price appreciation will be a triumph of regulation, showing that lending standards and prudence have been revived.
But a long period with little in the way of new equity for homeowners may retard the creation of new businesses. Not only will many who purchase between now and 2020 find themselves with little in the way of equity, the psychology towards home ownership as an asset is likely to change.
Americans were unusually lucky in the 30 years to 2006 because the value of their houses by and large went up more than inflation. The negative side of that was the propensity to use the house as an ATM machine to fund consumption. Using housing equity as a means to back risk-based enterprise was a much more valuable and under-appreciated outcome.
The longer we go without strong house price gains, the less likely those who’ve been lucky enough to have them will be to risk it on a new business.
That tends to argue for self-reinforcing booms in places like Silicon Valley, but less small-business creation across the rest of the economy.