If President Obama does win re-election in November, it won’t be because of an improving jobs market. Instead, he’ll owe his victory to a far more important indicator of US economic health: rising home values.
Unlike most other countries, the average American’s wealth has long been tied to real estate. And at no time was that more true than immediately prior to the last decade’s crash in the housing market.
Initially triggered by the wave of defaults among subprime borrowers, the real estate bubble’s implosion eventually depressed housing values 50 percent and more in many areas. What had been a vital store of wealth for the American consumer suddenly became an insurmountable financial burden, as home equity swung negative. Many homeowners found themselves unable to afford to sell their homes and move, as they owed more than their property was worth.
The crash in the US housing market was the key catalyst for the Great Recession of 2008-09. And it’s been the primary drag on dozens of industries since then, ensuring the past three years would be the most anemic economic recovery in memory.
Like every great catastrophe, this one has had a couple of salutary effects for long-term economic health. One is simply debt reduction. According to the Federal Reserve, household debt as a share of after-tax income dropped from well over 130 percent in the last decade to about 113 percent this summer, the lowest level since 2003.
Consumers still aren’t spending as they were in the past decade. But less debt as a percentage of income means they certainly can once the mood improves.
Over the past three years, US corporations have enjoyed the most favorable borrowing conditions in history. Rather than pile on additional debt, however, management’s response has been to continue deleveraging. Companies have also taken advantage of historically low rates to refinance maturing debt at much lower interest rates, simultaneously cutting costs and eliminating future refinancing risk.
This month, a unit of “BBB-” rated Ameren Corp (NYSE: AEE) became the latest electric company to sell 30-year bonds at a coupon of less than 4 percent. “BBB” rated energy midstream master limited partnership Enterprise Products Partners (NYSE: EPD) has bonds maturing Jan. 15, 2068, that now yield just 4.37 percent to maturity.
Ameren, however, has cut its debt maturing in two years from over 50 percent of its market capitalization in May 2010 to just 4.4 percent now. Similarly, Enterprise has cut its debt from over 50 percent to just 2.5 percent.
Both companies have used low rates to reduce debt risk, just as American households have done. And the result is both are better positioned to invest and grow than they’ve been in decades. Additionally, they now have the financial strength to weather a potential shock to the global economy.
The most visible risk to the economy in the coming months is still the so-called fiscal cliff that many fear would result if Congress and the president don’t roll back the tax hikes and spending cuts agreed to in last year’s federal debt ceiling compromise.
However, it’s extremely unlikely that the outcome will be anywhere near as negative as the election-year rhetoric would suggest. In fact, high-placed members of both parties are starting to make clear that a deal will be reached in time to avert a catastrophe, and that the November election is about what kind of deal we’ll see.
In other words, if Mitt Romney becomes president and Republicans take both houses of Congress, we’ll see far more cuts to non-defense spending, preservation of military spending and few if any tax increases. If the president is re-elected and Democrats capture both houses, we’ll see more tax increases, some defense cuts and less reduction of non-defense spending.
But regardless who wins, odds are strong we will see a deal, and therefore no fiscal cliff in 2013. And even if for some reason Washington fails this test of self-preservation, the lower debt outstanding among American companies and consumers means they’ll be better able to endure the fallout than in 2008.
Enter the rebound in the property market, which in retrospect has been taking shape for more than a year. Progress thus far is jagged, benefitting some regions like Northern Virginia far more than others like Las Vegas, Nevada. But the value of Americans’ real estate holdings overall did rise 2.1 percent in the second quarter of 2012. That follows a similar rise in the first quarter, and is likely to be repeated in the third quarter as well.
Unfortunately, we’ve yet to see any large groundswell of consumer spending as a result of the nascent housing recovery. In fact, it’s likely after the experience of the past few years that most Americans will take any signs of a rebound with a grain of salt, at least for a while.
But we are starting to see some unmistakably favorable spillover in certain industries. For example, the lumber mills in Canada that feed North American home building ran at 86 percent of production capacity in the first five months of 2012, up from 82 percent for all of 2011 according to the Western Wood Products Association. Lumber futures were very strong this summer, a sharp reversal from the mill closures during the housing bust.
Utility customer growth went into reverse in some areas during the housing bust. And few regions had a harder fall than Nevada, where rapid development literally stopped in its tracks, and vacancies skyrocketed. That sent NV Energy’s (NYSE: NVE) customer growth rate into the red, from the 5 percent to 6 percent annualized rate that had lasted for decades.
The situation is still far from healthy, and it may be years before the market fully recovers. But NV, which serves 95 percent of the state’s total load, is once again reporting positive customer growth, and expects an annualized growth rate of a bit over 1 percent for 2012 and increases thereafter.
Over the long term, customer growth is what feeds rate base growth for utilities. Its resumption in battered Nevada portends well for NV Energy’s future earnings and dividend growth. And we’re seeing the same thing play out across much of the rest of the country as well. Even in Michigan, power and gas utility CMS Energy (NYSE: CMS) reports industrial sales are growing 7.5 percent this year from 2011, when they reached pre-crash levels. That means jobs and better housing for consumers, and growing profits for the utility.
That means a rising housing market will play a major role in helping utility stocks generate future returns. The good news is the companies have their strongest balance sheets in many years and are arguably better prepared to handle a recovery and customer growth than at any time since the 1950s. Moreover, that same financial strength is also the best possible protection if the bears are right and a catastrophic event of some sort is on the horizon.
Throw in high yields and traditional seasonal strength–utilities have rallied in the fourth quarter of the year 36 times since 1969–and that’s all the reason anyone should need for buying and holding these stocks for the rest of the year and beyond.
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