Is the slowdown in the housing market predicting an overall downturn for the economy?

In general we believe the stock market looks outward in the 6-12 month range concerning the economy and has priced in that forecast; however what about housing?

Granted housing is far from liquid. It is also in some respects a regional commodity based in supply and demand concerning micro and macro inputs. Like stocks housing and specifically mortgages are definitely impacted by interest rates presented in the equities market, which in turn impact mortgages, and credit card rates.

The news from the housing front seems to have gone from a seasonal pattern to one showing a trend. Some recent headlines from the housing front:

Pending home sales tumble to 4-year low in latest sign the housing-market correction has arrived

GOLDMAN: 3 reasons why the US housing market is slowing down

House price growth slows to nearly two-year low as Case-Shiller makes the slowdown official

Peers have suggested part of the issue is interest rates year over year are up one full percentage point. Coupled with somewhat inflated housing process nationally the 1% increase does in-fact impact affordability especially at the first-time home ownership market, which has been literally priced out of the market since the end of The Great Recession.

The paradox is the equities market continues to be at elevated levels leading to the overall “wealth effect”. Also the economy has the lowest unemployment rate that goes back multiple generations. Thus based on the above positive statistics the housing market should continue to be on an upward trajectory yet its not.

I went back a to the early 2000’s to see how the housing market reacted before The Great Recession reviewing notes from the Federal Reserve; some take-aways include:

  • U.S. house prices began to rise more rapidly in the late 1990s.
  • Prices grew at a 7 to 8 percent annual rate in 1998 and 1999
  • In the 9 to 11 percent range from 2000 to 2003
  • In 2004 and 2005, when the annual rate of house price appreciation was between 15 and 17 percent

Thus prior to The Great Recession there was a massive run up in housing values around the country. Part of the run-up was due to Adjustable Rate Mortgages i.e. ARM’s, which provided lower interest rates and thus lower PITI. Also there was rampant speculation in markets including Phoenix, Las Vegas and others where underlying economic statistics i.e. in-migration, average incomes and others were not in tandem with the rise in the underlying housing market. Thus a bubble formed and subsequently burst.

Personally I remember having a client purchasing a home with a 125 Loan to Value Mortgage meaning their loan was literally 25% higher than the underlying value of the home. Their i.e. buyers rationale as well as that of the lending institution was real estate values can only keep going up.

Are we witnessing a similar pattern in housing as seen in the early to mid 2000’s? The answer is yes and no. We have witnessed a serious run-up in values however the baseline from The Great Recession was historically low. Also we are not witnessing the frenzied pent-up demand for housing with buyers lining up for first opportunity to purchase spec. homes. Also lending requirements have become more stringent however I am seeing a return of no-document loans, low down payments i.e. 3% and other loan products that may be challenging in a downward cycle.

Is the housing market due for a bust? I do not believe so as we are not necessarily in a bubble. However are lower prices on the horizon? I believe so. Locally in Denver we have seen the revision in values from the luxury market all the way to the first-time ownership segment.

On the high-end a house in the Denver Country Club came on the market one year ago at $2.3M and sold within the last month for $1.7M. On the lower-end units in Monaco Place, a large condo complex at Hampden Monaco has 2BD units trading between $210-215 in the spring of 2018, more recently similar units are selling below $200 and some in the $180-$190 range.

My sage advice coupled with a historic perspective is as follows:

If purchasing for the longer-term i.e. more than 3-5 years should be OK. There may be continued softening in the market however interest rates are still below 5%, coupled with potential tax advantages ownership may be a positive.

If looking to fix and flip or rental may need to be a little more cautious. Unless the residence is quite underpriced to the overall market and/or there is upside due to renovation and/or location, again would proceed with caution.

If looking to buy and sell within the next 1-3 years I would probably suggest holding off. Between a softening of prices, rising interest rates coupled with costs associated with selling i.e. commissions, Title Insurance and so forth gain if any may be minimal.

If a seller, may be consider selling now as historically when the market softens we may witness increased inventory, which in turn will depress prices. At present inventory is still challenged and thus may be propping up short-term pricing.

Overall am I concerned? Not at all. Like all markets there are corrections. We have been in a seller’s market since The Great Recession and the markets are now moving more towards equilibrium, which is actually a positive for sellers and buyers. In general until this last generation housing was viewed as a solid investment to match or exceed inflation. It was not until the generation of easy access to money that housing becomes a commodity and home equity loans also known, as HELOC’s became the ATM of choice.

As we may remember the housing market started to show concern many months before The Great Recession hit full-force. While the underlying economy seems to be humming along are we on the later-side of the bell curve concerning economic activity? While we can collectively discuss stimulus, tax-cuts and so forth for every action there is a reaction. My gut and I hope I am wrong we have traded short-term growth versus longer-term health as I do not believe business cycles have not in fact ended.

The millenials may have the right idea concerning holding off purchasing homes. This generation witnessed the carnage between 2008 and 2012 and is proceeding with caution; maybe a good lesson for all of us.

 

 

 

 

 

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