MCF Insights: The Housing Market Looks Robust to Start 2020
Is housing a leading economic indicator or lagging indicator? Or neither?
Historically, the housing industry has led the U.S. out of a recession and many economists consider new housing starts to be a leading economic indicator versus a lagging indicator. Think of it this way:
If new housing starts rise, intuitively it means builders are optimistic about the demand in the future for newly constructed homes. If, on the other hand, housing starts fall, builders are getting more cautious because they think home sales are slowing or that they will slow soon.
But more recently, housing starts have been confusing. Consider the following from the National Association of Realtors.
Housing Market Looks Strong
In late January 2020, the National Association of Realtors showed a very robust housing market. From the NAR release:1
- Total existing-home sales increased 3.6% from November to December
- Overall sales took a significant bounce, up 10.8% from a year ago
- The median existing-home price for all housing types in December was $274,500, up 7.8% from December 2018 ($254,700), as prices rose in every region
- This marks 94 straight months of year-over-year gains
- Properties typically remained on the market for 41 days in December, seasonally up from 38 days in November, but down from 46 days in December 2018
- 43% of homes sold in December 2019 were on the market for less than a month
Is the Momentum Sustainable?
Given that we are still within the longest expansion period in history – at approximately 11 years – is housing an economic laggard now? Is this sustainable? Maybe, but much depends on the direction of the overall economy. 2
Over the past couple of months, solid evidence has emerged that the housing industry is on solid footing. Inventory is tight, prices are increasing in every region in the country, interest rates remain low, unemployment remains at historical lows and the overall housing trend is positive.
Further, about one-third of all of the homes sold in 2019 went to first-time buyers, which could indicate a decline in the need for apartments, a sector that has been very hot for the past three or four years.1 While the Northeast continues to see some pressure on home prices, it still was up 8.8% from a year ago while the Midwest was up 9.2%, the South 6.7%, and the West 10.7% from a year ago.3
With mortgage rates coming in below 4% across all of 2019 and trending lower as the year progressed, more and more people can afford to buy homes, and that could help sustain the industry’s momentum.4
In addition, the housing industry creates jobs, and also has a tremendous spillover effect into many different areas of manufacturing – new homes need washers, dryers, furniture, curtains and the like. And consumers continue adding to the good news by heading back to stores, causing an increase in retail sales numbers.
But Remember 2008?
How many of us remember the Housing Crisis from 2008? That housing bubble affected most of the United States as housing prices peaked in early 2006, declined for most of 2006 and 2007 and reached new lows in 2012. 5
Consider these stats from 2007, as reported by NAR from their release dated January 24, 2008:
- Single family home sales fell by 13 percent in 2007, which was the largest drop in 25 years6
- Prices of homes sold in December registered the biggest year-over-year decline on record7
- 2007 was the first year on record that had seen a drop7
- The median price of homes sold in December fell nearly 6 percent from a year earlier7
- This was the first time that the annual price reading showed a decline since the group started tracking that measure in 19687
Your Housing Market Philosophy
What does all of this mean? Well, that of course depends on your perspective and where you are in your financial planning journey. Are you a first-time home buyer or are you looking to downsize in a couple of years? Could you withstand a 10% drop in your home’s value?
These are important questions to consider as our homes usually represent a very large part of our overall portfolios. Therefore, it is important to make sure we account for market movements and determine how such movements might impact our risk profile and long-term planning.
All homeowners and would-be homeowners would also be wise to remember the words from philosopher George Santayana when he said:
"Those who cannot remember the past are condemned to repeat it.”
The reality is that at some point, the housing market will turn. And at some point – and no one knows when – there will be another housing recession. However, it doesn’t seem to be soon.
2 https://www.fanniemae.com/portal/media/corporate-news/2020/economic-housing-outlook-012120-6974.html
3 https://www.nar.realtor/research-and-statistics/housing-statistics/existing-home-sales
4 https://www.bankrate.com/mortgages/mortgage-rate-forecast/
6https://www.nytimes.com/2008/01/24/business/worldbusiness/24iht-24housingFW.9474593.html
7https://money.cnn.com/2008/01/24/news/economy/housing_prices/index.htm
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