Morningstar's Bob Johnson says even though housing is a relatively small part of the economy, any movement is relatively large, and that has an impact on the GDP.
Jeremy Glaser: From Morningstar, I'm Jeremy Glaser. I'm here with Bob Johnson, he's our director of economic analysis, for a look at the housing industry.
Bob, thanks so much for joining me.
Bob Johnson: Great to be here today.
Glaser: So we talk about housing a fair amount. So I thought it would be worth just to discuss a little bit about why this is important, why you focus so much on this housing data?
Johnson: Housing is a relatively small part of the economy as you might guess. It's 3% to 3.5% of all GDP goes to some type of residential investment. So it seems small but it's a number that moves relatively largely. I mean we think, for example, home starts would probably be up about 10% this year. So you start taking even a small part of GDP and say it's going to grow at a pretty high growth rate, that has an impact. And in fact the only real two parts to the economy that are showing significant growth right now are the consumer, which is almost all of GDP growth and a small tag-on effect from the housing market which typically adds 0.3 to 0.5 of 1% at recent run rate. So a nice contribution, not quite as big as what the consumer is doing, but with business not spending and import-export kind of sitting this one out, it's nice to have this little bit of help from housing. So we do watch that one very closely.
Glaser: Looking at homebuilder sentiment, was there any impact of kind of what's happening in the world, with Brexit, with the coup, Turkey would be after this data, but any signs that homebuilders are getting nervous?
Johnson: Not really. I think we've had four, five, six months of pretty consistent data right around the 60% mark and of course, like a lot of the fusion indexes that means 60% have a positive outlook on the world. There are three subcategories to that. We've been right about 60% for a number of months, now we had four months in a row of 58%. We had 60% in June and now we've got 59% in July. So statistically I don't think the numbers are very much different. They are in nicely positive territory. So just the fact they are seeing continued improvement means that we should see continued growth in that sector. So good to see that. A little surprised, although maybe it's too early yet, you know one of the positive effects of Brexit is kind of lower mortgage rates. And those usually pop up the mood of builders and that didn't happen this time.
Glaser: You mentioned you were hoping starts to be up about 10% this year. We were short of that number in data released this week. Why are single family homes--why have those starts looked a little bit below that trend?
Johnson: I think there is a number of things going on. I mean I think certainly prices have been more expensive and certainly until recently mortgage rates hadn't done as much as they had earlier in the year. So there was some reason to believe that it was slowing, but now I think all of this data is through the end of June on starts and permits. So that hasn't flowed through the data yet, the mortgage data. You can't react in the seven days that you would have had to do that. You can on the mortgage application which obviously boomed. But in actual starts and permits, we didn't see it yet. Now you mentioned the emphasis here is on single family, but the multifamily is part of this equation too.
Glaser: How did that, that stabilized in the month?
Johnson: It did. Keep in mind we've had a couple of situations on multifamily. There was a big tax credit a year ago in New York. So that really spiked up the permits. So it makes any kind of comparison meaningless, but for the record it's down about 30% from where it was a year ago. But on the other hand, I would say that sequentially the multifamily had slowed a little bit partially on all that New York business burning off. But also because of demographics and now it looks like maybe that number has stabilized a little bit, at kind of 400 million or so approximate run rate on multifamily that we aren't going into some kind of free-fall. Because we were up in the 500s at one point. So we have indeed come back, but I think that we have stabilized. And it's not going to be like we've got this relatively slower single family market and this collapsing apartment market that's going to tear us apart. I think that the apartments have stabilized.
Glaser: So you mentioned that Brexit's not appearing to have a big impact, change of interest rates is not appearing to have a big impact on this housing data. The IMF weighed in on Brexit this week. Do they see any bigger impacts on other parts of the economy or other parts of the world?
Johnson: Well the IMF did weigh in and they did say that they thought it would take at least a tenth of a percent off of the 2016 data and a little bit going forward. But it was a complex release and they went through a bunch of scenario analysis in talking about that the effects could be bigger or smaller in the years ahead. But really there is so much unknown yet. We haven't even had the official declaration they are leaving and how they are going to negotiate when the go away. So there is a lot unknown, but they nevertheless did take the numbers down for right now and said they thought it would see lower growth. And at the same time they also mentioned that the U.S. growth rate, they brought that down to 2.2% which is still maybe a little bit high. They were way too high to start with and now with the year off to a relatively slow start, I think they just brought the number back in line with where it needed to be and that.s not related to Brexit. I think they said that U.S. is relatively unaffected by Brexit. I actually think it's more of a net positive.
Now there is a couple of pieces of data where we have heard a little bit of an affect and certainly one of them was immediately building and construction in the U.K. market, where some of the starts--the equivalent of starts and permitting data--are beginning to look a little weak. As immediately people are kind of saying, well people aren't going to build their headquarters here anymore, maybe the bubble that we've seen in the housing in this market will come to an end. So clearly we've seen a little bit of a slowing already and that will turn up in their numbers and in real GDP over time, that we've seen in this slowing housing market in the U.K.--not housing, but any kind of construction-related situation. And keep in mind in many markets because of quantitative easing, housing has been relatively booming sector. One of the bright spots and clearly to have that slowing here isn't great news and that may turn out to be one of the biggest impacts on the data.
Also we noticed today there was also some what has changed is little bit of sentiment. I can't say I have seen it in the hard data yet and there has been a real issue with sentiment data being way more negative than the actual data turns out to be. But certainly German business sentiment fell to its lowest level in four years on the Brexit news. So clearly it's affecting psyche, maybe not the real data quite as hard.
Glaser: Well Bob, thanks for your insights today.
Johnson: Thank you.
Glaser: From Morningstar, I'm Jeremy Glaser. Thanks for watching.
