In my last article, Concerns About The Real Estate Market And Stock Market As A Whole, I explained that further exploration must be conducted once the data for December and January is released. At the time of writing, there have been a few official releases pertaining to data from December; January data will come at the end of this month. In this article, I will discuss the changes that data presents and paint a bigger picture of the real estate market as a whole.
FRED housing starts show the beginning of construction on housing projects. Specifically, it shows the percentage change from a year ago, averaged quarterly. It has now been updated for December and shows the continuation of a downward trend.
Let’s zoom in and take off the three-month smoothing.
It is quite obvious that the last few data points indicate negative housing start growth. Rather than a quick one-month dip into the negative (which happens quite often), there are three months of negative growth. It is not just a fluke data point - not just something regional. It is a sector-wide slowdown that started in the second half of 2018. Negative growth in starts of construction projects is an indicator of a slowdown of housing sales, a slowdown of price growth and, ultimately, a national slowdown of economic growth as a whole.
New Housing Permits
FRED New housing permits recovered slightly in December, though they are still no longer trending upwards.
Here is the year-over-year growth, indicating that December was not the end of the downtrend.
Because of their usefulness as a leading indicator and tendency to act as a “pulse” for the housing market, I pay a lot of attention to housing permits. The December data does not prove my theory, however. If there is a steep decline in this graph, which currently is not the case, real estate investors should run for the hills. Again, more data is needed. I believe we start to see the decline in January and February, which will not be released until later on.
FRED New One-Family Houses Sold is pretty self explanatory. When house sales go down, so does the housing market. Sometimes the drops are much more tame, yet still bring the sector to its knees.
Over the last two quarters, the number of houses sold has been decreasing, with a swift recovery in November and December. However, yearly growth is still firmly negative. This could indicate a recovery from the slowdown, with sales picking up. But I’m much more inclined to believe the downtrend will continue in January and February because of other indicators showing the slowdown has not stopped.
Median Housing Prices
The most important aspect of the real estate market is pricing. FRED’s Median Sales Price of Houses Sold is something investors, home buyers, and developers watch closely.
During times of housing slowdown, and preceding recessions, this data begins to show a downtrend. Every single time we see price action similar to that of the last few quarters, the housing market has peaked and a real estate slowdown is already occurring. To me, this is the most obvious evidence of a slowdown, and I believe many investors are unaware of it, as real estate stocks keep reaching new all-time-highs. This is price action similar to that seen in 2007, 1990, 1979 and likely more.
Listings with a price cut
Realtor.com reports their own real estate data, including the number of listings with a price cut. Nationwide for the month of January, the number of listings with a price cut increased 25% year over year.
In February, this number increased 16.4% year over year. Anecdotally (not to be used for an investment basis), I’ve noticed that a majority of home listings in my mid-sized city have had their prices cut over the last 30 days - specifically the more expensive ones. These can be easily seen on Zillow nationwide, and I encourage you to check them out.
There is clearly a slowdown in the real estate sector. The real estate market has already peaked and will continue a decline. I believe this is due to investors pricing out “normal” homebuyers, like families, within an old-fashioned bubble. Yearly, housing starts and housing permits are trending down, housing prices have peaked, home sales are down (yet recovering), and price cuts are up. Yet, real estate stocks continue to reach all time highs. As REITs release their earnings reports, pay attention to their asset values. I see dwindling earnings and dividend cuts in the future for them. Usually, a recession follows a slowdown in real estate; though it is too early to make that call. Continue to pay attention to new data that comes out, as each release counts. We’re in for a rocky year.
Disclosure: I am/we are short VNQ, STWD, ICF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.