(James Saft is a Reuters columnist. The opinions expressed are
By James Saft
July 18 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 annualized gain of 8.8 percent,
chunky but well below the 11.8 percent 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. (here)
"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 theorize 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
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
annualized gains of just 3 percent 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 percent
annualized rate for the next eight years, most likely has
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.
(At the time of publication James Saft did not own any direct
investments in securities mentioned in this article. He may be
an owner indirectly as an investor in a fund. You can email him
at email@example.com and find more columns at blogs.reuters.com/james-saft)
(Editing by James Dalgleish)