The real damage that the fiscal cliff is causing is mainly psychological at the moment, discouraging both capital investment and hiring. I’m not allowed to use the phrase that involves metal food containers being moved further along transport routes by means of the foot, as we have a "cliché box" at work, and saying it would cost me dearly – but that is both the obvious solution to the problem, and indeed the only solution.
The size of the US debt is now too big for any politician to deal with decisively, and some sort of default – against bond holders if a default against the population’s pension or healthcare expectations isn’t possible – or devaluation (currency or inflation) sometime in the future will be likely.
The focus on the fiscal cliff has taken attention away from what we think are extremely positive developments elsewhere in the US economy – and particularly in the housing market.
US housing became the centre of the global financial crisis from 2007 onwards, when the credit bubble burst as sub-prime mortgage loans started to go bad. Too many houses had been built, and the overhang of unsold inventory together with foreclosures, falling real incomes and unemployment led to a sharp fall in house prices.
But we’re now seeing a large number of positive signs in the US housing market, and just as the negative multiplier effects spread through the economy when the sector tanked, the reverse may be true next year.
The available inventory of housing is now contracting sharply, to the extent that US growth should continue. It is also at a level where house-building should resume – and the multiplier effect from that will be extremely powerful.
House prices have been rising, according to the S&P/Case-Shiller index, since March this year, but remain "cheap", 30 per cent below the peak in nominal terms, even weaker in real terms. So the negative sentiment around the sector will be fading somewhat – nobody wants to buy into a falling market.
Additionally, the US Federal Reserve (Fed) has almost entirely moved its quantitative easing (QE) programme away from purchases of US Treasuries and towards the purchase of mortgage-backed bonds.
This should eventually help get the transmission mechanism working again. In theory, American mortgage investors should be able to refinance existing mortgages at high rates into new lower-rate loans.
This hasn’t been happening – banks have dragged their heels on paperwork and lending standards for the new mortgages are often higher than they were for the outstanding stock of mortgages.
New 30-year mortgage rates are around record low levels of 3.31 per cent. But as at 2011, 28 million Americans had outstanding mortgages with rates more than 1 per cent higher than the rate for new mortgages – in theory these are all refinanceable at lower levels.
You could read this as bad news, but it represents a possible windfall gain for consumers if the transmission mechanism does start working again (lower interest payments equal more spending power). And the Fed is now focused on making the transmission mechanism work – it will get better.
So if the price of US housing is attractive, and mortgage rates have fallen, and there’s an increasing level of demand relative to low supply, how powerful can this be?
Well we saw how powerful the negative impact was post-2007 – the multipliers involved with housing construction and household formation are very strong.
A new housing construction project may result in a contractor hiring more workers, who buy pick-up trucks and power drills, and have wages to spend in their neighbourhood.
They buy cement (from Cemex hopefully, a high-yield company we like) and wood. And the people who move in buy carpets, chairs and flat-screen televisions.
The Australian Bureau of Statistics (ABS) calculated construction multipliers back in 2002. It found that there was an initial effect; the employment of construction workers and what they produce, a first-round effect; the output and employment of those that produce the goods and services to the construction industry needs, an industrial-support effect; the extra output impact on the suppliers to that first-round effect, and a consumption-induced effect; increased spending resulting from the wages resulting from all of those efforts.
The ABS did warn about the multiplier being overstated from the theory to the actuality, and Australia is obviously not America – but the numbers show the power of housing and construction, and could make you very bullish on the US economy over the next couple of years.
Which brings me on to my final, and tenuously related point – I had a coffee with George Trefgarne last week, the former economics editor of the Daily Telegraph, and the author of Metroboom, a paper about Britain’s recovery from the 1930s slump.
We can debate about whether it was austerity or currency devaluation that got the UK out of depression – but house building was certainly part of the solution.
Between 1931 and 1939 we were building from 200,000 to more than 350,000 new houses per year. Compare that with the UK today, where despite the much bigger population, we’re building fewer than 150,000 houses per year, while rents rise and affordability remains a problem for most.
In some ways we are lucky – we have a potential solution to the UK’s weak growth – allow house building to take off by loosening planning restrictions, incentivising house builders to release land banks.
If you are Spain, and you have a huge glut of housing, this is not a way out of the ongoing crisis – but for the UK, or the US, building homes could be the answer.
Jim Leaviss is head of retail fixed interest at M&G. The views expressed here are his own.