My Comments: All of us are uncertain and anxious about the upcoming elections and how the outcome will impact our lives. The following article and the one I have scheduled for tomorrow suggest that life will go on, no matter what. And that life is going to be pretty good for most of us, no matter what. The irrational fear by some on the right that the world will come to an end if Obama is re-elected is, to me, mind bogglingly stupid. Others will argue that if Romney is elected, the world will come to an end which is equally dumb.

Yes, I am going to vote and I am going to hope that those in charge share my values but I’m not going to get hysterical about it. I remember a comment made to me in a context I cannot remembers that said “The good times may come to an end, but then so do the bad.” Worth thinking about. If you have money to invest, we can help you take advantage of whatever develops in the future; just don’t lose faith that there will be a future worth having.

By Roger Altman October 11, 2012 6:22 pm

There is no sector of America’s economy that is more cyclical than housing. If it is pushed down far enough and long enough, as it was in the post-2008 housing depression, it will eventually snap back to levels that exceed historical norms. That turn in the market is occurring now and it should become a boom by 2015. It will be powerful enough, together with rising oil and gas production and other factors, to lift the entire US economy. Indeed, the resultant US economic growth rate may be higher than the Federal Reserve’s long-term forecast of 2-2.5 per cent.

This surge will be driven by a combination of improving house prices, a lower inventory of homes for sale, rising rates of household formation and population growth, and improving access to mortgage credit. Together, they should push residential investment, which includes both new construction and remodellings, to annual growth of 15-20 per cent during the next five years. This alone may contribute 1-2 percentage points to annual growth in gross domestic product and up to 4m jobs over that period.

It is the depth of housing’s fall that has laid the foundation for this. And it is hard to exaggerate how deep that was. Single family housing starts, for example, averaged 1.4m annually during the 2000-04 period, before the bubble. After it, they plunged to an average annual rate of 500,000 and stayed there. New home sales, which previously averaged 900,000 a year, fell to a third of that. And residential investment, which averaged 4 per cent of US GDP over the 25 years ending in 2005, has accounted for only 2.5 per cent of it since 2008.

Now, however, the cycle is upward, starting with prices. The S&P/Case-Shiller Composite 20 City Home Price index has risen 8 per cent since March. Indeed, Barclays has projected that, by 2015, nominal home prices will exceed their 2006 peak. Home affordability is also way up, as the ratio of mortgage payments to both income and rents has never been more favourable. Moreover, the relationship of home prices to household income is back to the level of 30 years ago. Rising prices and affordability, of course, lead directly to the buying and building of homes.

Second, the levels of relevant supply have fallen sharply. The number of homes for sale has fallen back to its long-term average of 2m. Yes, there is a larger “shadow inventory” of homes that are in foreclosure or carry delinquent or defaulted mortgages. However, many of these are distressed, in that they have not been physically maintained. This means that the supply has become two-tiered – quality homes and distressed homes. For most buyers, only the first of these two markets is relevant and the supply there is approaching its lowest level since 1992.

Third, housing demand is going to be strong, driven by demographics. The International Monetary Fund forecasts that the US population will increase by 15m during the 2012-17 period, more than the increase of the past five years. The two groups of the population that are growing fastest are the over-55s and the so-called echo boomers, the grandchildren of the baby-boom generation. The first group has the highest rate of home ownership. The second has been renting disproportionately, and is primed to start buying. JPMorgan estimates that 6m new units of housing are needed by 2017 just to serve the bigger population.

Then there is the coming recovery in household formation. According to JPMorgan, this rate was steady at about 1.4m annually from 1958 up to 2007. But, it plunged below 500,000 for the three years following the financial crisis, as young people moved in together or lived with parents. Now it has doubled from that level and estimates of pent-up households are at an all-time high. Most expect formation rates to rise much further still, exceeding the 50-year average for a few years.

Finally, the availability of mortgage credit is starting to improve. Underwriting standards tightened sharply following 2008 and the proportion of home sales that are financed by new mortgages is now at a 10-year low. However, household finances have improved sharply, with debt service ratios returning to pre-crisis levels. Moreover, banks also need the income from originating mortgages. Mortgage credit availability is therefore opening up, which also boosts home sales.

For now, the stubborn economic headwinds that began in 2008 continue to suppress US growth, which crawled along at a rate of only 1.7 per cent rate for the first half of 2012. While it may take the best part of two years for these headwinds to die, the stage is being set for a strong economic recovery beyond that. And the housing boom will be its biggest driver.

The writer, who served as US deputy Treasury secretary from 1993-94, is founder and chairman of Evercore Partners