- The U.S. housing market continues to advance with prices rising as are volumes.
- Mortgage applications have risen and the only concern is affordability.
- However, new and used homes are not perfect substitutes for each other, whether people can continue to afford is less of a worry than many think.
The importance of the housing market
Given what happened to the economy last time around, clearly we're all aware that the housing market is about more than just people having somewhere to live. If that weren't true, then that little difficulty in 2008 would have just been that people could buy somewhere more cheaply. That isn't how it turned out and thus housing is of greater and wider importance.
The truly large effect is the "wealth effect." If we think we're richer - by having more assets - then we spend more. This is an implication of the lifetime spending hypothesis. Greater assets now means we have to save less for the future. The reverse is also true, if we suddenly think we're less rich then we'll draw in our spending. As Dean Baker has been pointing out, this last decade the housing crash meant we were going to have a recession - the evaporation of $7 trillion in household wealth just meant we were, whatever happened to Wall Street.
So, we're keen on monitoring the housing market, both as a place for our own investments and also as a guide to that wider macroeconomy.
The latest figures are showing us that it's doing just fine. Prices are rising - in general this is - about in line with real incomes plus inflation. New home sales are rising, as are their prices, thus the housing stock is continuing its gradual turnover. Mortgage applications are doing just fine.
The end result of this is that on the microeconomic level residential housing is, as it has been for some time, a just fine place for us to be investing. Of course, that doesn't approve any specific housing investment, just tells us the general market background. On the macroeconomic level, we're not seeing any build-up of imbalances which might lead us to worry about a more general slowdown in the economy caused by that housing market.
We've the Case-Shiller indices for the month:
(Case-Shiller indices from Moody's Analytics)
We should note that this is not seasonally adjusted and, of course, housing prices do vary with the seasons. Few go house hunting north of the Mason-Dixon Line when you can't see over the snowdrifts.
The general view is:
Low housing finance costs and continued supply-side constraints will keep sellers in full control of the market. Despite weakening housing affordability, house prices will continue to trend higher in 2020, albeit at a slower pace than in the early years of the housing recovery.
This is a much more short-term measure and current movements are largely driven by meanderings in the mortgage rate itself. Not entirely surprising that the demand for something is driven by its price.
Mortgage applications rose 1.5% over the week of February 21. The refinance index decreased by 0.8% while the purchase index increased by 5.7%. The 30-year fixed rate mortgage was down to 3.73% from 3.77% in the previous week.
(Mortgage applications from Moody's Analytics)
It's the 12-week moving average that is more important with such a short time period statistics as this. And that's doing just fine, more people are applying for mortgages, we can see there's still demand in the market.
FHFA house price index
One measure of housing prices is the FHFA Purchase-Only House Price Index which is up on the year:
The Federal Housing Finance Agency Purchase-Only House Price Index increased 5.2% in December on a year-ago basis. This is slightly faster than November's increase. Healthy demand and tight inventories continue to push up house prices.
(FHFA Purchase-Only House Price Index from Moody's Analytics)
The really important part of this is the following:
House price growth closed the year at 5.2% nationally, right in the 5% to 6% sweet spot. Prices have increased for 34 consecutive quarters. House price growth was slower in 2019 than in 2018, but affordability improved.
The price of something is the price of it, sure. But the price of a house isn't - given that near everyone finances - the price of the house. It's the cost of financing the purchase of the house. And given the importance in terms of family budgets, our affordability measure is the cost of finance, the change in household income and also the price of the house.
Real incomes are rising, the price of finance is falling very mildly, house prices are rising at around and about real incomes plus inflation. This is something that can go on for as long as the three variables stay that way. And we're not really seeing any sign of them changing.
New home sales
One result of all of this is that new home sales are performing strongly:
The new-home market is hitting its stride. New-home sales jumped 7.9% in January to 764,000, the highest level since 2007 and above our and consensus expectations. Sales were also revised higher to 2.3% at 708,000 in December (previously a 0.4% decline).
(New home sales from Moody's Analytics)
Piecing it all together
We're interested in three things about the U.S. housing market. The first is simply whether we should invest in real estate or not. And the answer here is sure, why not? No, it isn't yes, certainly, because we're in a reasonable market here, not some obviously one way speculative frenzy. So, a particular investment will depend upon the specifics of that investment, of course. The location, house type and so on. Whether we want to live in it, or whether we can easily find good quality tenants and so on.
What this macroeconomic view can tell us is only whether the macroeconomics of the situation look good - they do.
We're also interested in the providers of such housing. Consistently rising prices with good demand will mean good business for the housebuilders. So, if we're more interested in the stock market than directly into real estate they look like another reasonable home for our money. Again, this is only the macroeconomic view, not a measure of any one specific stock.
Finally, we're interested in what the housing market can tell us about the economy more generally. After all, last time around it was housing that collapsed first, then the economy. We see no sign of that at present. Quite the opposite in fact. No speculative boom that would make us worry about a bust just over the hill, no bust evident right now either.
We can be generally relaxed about the performance of the economy in general, that is. At least, we can't see anything building up within the U.S. economy itself that's going to lead to any general, macroeconomic, reversal. There are always outside influences we might want to worry about - coronavirus, political and electoral risk. But there's nothing inherent in the current economic numbers to lead us to predict a slowdown.
The reading of macroeconomic runes is about trying to spot whether things are about to change, why they might. The current flow of the U.S. economic news tells us that there's nothing that appears about to cause such a change. We've not got anything in those domestic numbers that tells us the economy is going to speed up or slow down. Whatever risks we face are things external to the domestic economy, that is - it's things outside that might cause us problems.
This is what we are usually trying to do with such macroeconomic analysis. Rule out why things might be a bad idea. We can't, looking at macroeconomic influences, decide that a specific investment is a great one - that will always depend on too many small scale influences. Macroeconomics will only be able to tell us whether a sector is likely to do well or not.
Within that constraint we can say that residential housing is looking just fine as an investment in the U.S. at present.
The investor view
We might want to worry about other things, that possible pandemic, who is going to win in November. But within the current U.S. economy there's no great risk that can be seen. More specifically, real estate still looks like a good investment. Either for us directly, or into those who produce new housing. Further, we can't see any reason why the real estate market might, like last time, cause a general economic turnaround. we're not, as we were in 2004/5, in the middle of an excessive boom that was obviously going to end. Nor are we, as in 2006/7, in that slump following such a boom. Residential real estate just isn't about to produce either a speculative frenzy or a significant reduction in the size of the economy.
This article was written by
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