Concern seized the U.S. housing market in late 2018, prompting discussion about an impending slowdown, a recession even. After home prices skyrocketed earlier in the year, the back half of last year ushered a softening that invoked comparisons to the real estate crash of a decade ago. Yet by the onset of 2019, anxiety seemed to have thawed as the billowing headwinds failed to topple the market.
“The U.S. real estate market looks like it is on solid ground” this year, says Ralph McLaughlin, deputy chief economist at business intelligence firm CoreLogic.
Another housing market crisis is unlikely in the immediate future, primarily because the trouble-prompting factors of the mid-2000s aren't present today. In the pre-bust period, subprime loans stirred up demand and hurled the market into overdrive, whereas today, tight supply reigns, coupled with stern mortgage requirements.
This peculiarity, however, spawns its own issues. High home prices and low inventory, which dominated 2018, erode affordability that further suffers when mortgage rates spike. Such “pain points,” McLaughlin says, often fester rather gradually, as the real estate market moves slowly compared to the stock market.
Even with a slow-moving market, certain industry indicators offer a prognosis to buyers, sellers and investors alike. Several such gauges, when measured collectively, could measure the vitality of mostly any housing market under nearly any economic condition.
[Read: The Guide to Buying a Home.]
Here are the indicators you should keep an eye on to better understand the future of the housing market:
- Home prices
- Home sale volume
- Available housing inventory
- Mortgage rates
National resale value for all housing kinds neared $254,000 in December 2018, swelling by 3 percent from 2017, according to the National Association of Realtors.
“Home prices are reaching all-time highs with each passing month,” says Lawrance Yun, chief economist for NAR.
Alongside a national trajectory, home prices, like most economic indicators, chart independent tracks in regional markets, creating unique micro characteristics. While every state logged value increases in 2018, some – like Idaho and Nevada – experienced the largest upswings, according to the Federal Housing Finance Agency House Price Index. Others, like North Dakota and Connecticut, hardly saw a 1 percent growth in the FHFA House Price Index.
The distinction between national and local trends reveals differences in the overall performance of the U.S. housing market.
“Some places had prices that really went up during the boom in the early part of (the) 2000s and then seriously went down in the bust,” says Kurt Usowski, deputy assistant secretary for economic affairs at the U.S. Department of Housing and Urban Development. “(In other places, prices) went up some but didn't fall as much. Most places have recovered their house prices from before the housing bust.”
When comparing long-term price changes, however, the nuances between seasonally adjusted and unadjusted numbers could distort conclusions. Unadjusted values in seasonal shifts, such as winter slumps, could imply a market downturn when it's simply a part of the annual cycle. Hence, McLaughlin advises to contrast any value data with those of a year earlier, rather than the prior term.
“It is the same as the leaves falling off the tree – it doesn't mean that the tree is dying,” McLaughlin says. “It will come back in the spring.”
Soaring home prices usually dampen sale volumes. In January 2019, citing its latest data, NAR recorded about a 1 percent monthly decrease in the number of sales, which, nationally, totaled roughly 5 million transactions. Year-over-year, the drop is 8.5 percent, with the greatest decline in sale volume occurring in homes that sold for $250,000 or less.
“In the past, when housing went down for a long period, then it dropped the rest of the economy down,” Yun says. “But when housing retreats only for a short period and recovered, then the economy is fine.”
With positive job growth and mortgage rate reductions, sales – which usually peak in spring and summer – may improve.
As you read about home sales, be sure to note if the data is based on all sales, existing sales or new home sales. As a reflection of only new construction properties, new home sales capture an exclusive segment with higher prices and can mean different things for the local market.
“New-home sales are a very small part of the market, generally less than 10 percent,” Yun says. “Sometimes it can be as low as 6 or 7 percent of all transactions.”
Residential construction, reported by the U.S. Census Bureau and HUD, offers a barometer for future supply. More than 1 million housing units reached completion in 2018, or over 2 percent more than the 2017 tally, according to the U.S. Census Bureau.
The year-over-year boost obscures labor shortages and material-cost surges, some of which emanate from the Great Recession, when construction halted and the industry shrunk overall. “A lot of the builders who had land inventory might have had to liquidate some of that in order to maintain their cash flow during the recession when they weren't selling very many houses,” Usowski says.
The quantity of homes for sale hinges on disparate factors. Recently escalating prices, for instance, surpassed the means of many potential buyers, especially first-time homebuyers, letting the number of available homes rise.
In December 2018, new home inventory – at 344,000 – accounted for a six-month supply, according to HUD information. Existing housing shaped a harder market with 1.59 million properties, a pace that kept less than four months of inventory on the market. This, though, is better than earlier in 2018.
“The spring of last year was one of the tightest market conditions – just not enough homes for sale,” Yun says. “(S)ome loosening in the inventory is a welcoming sign.”
Today's still modest inventory counters the boon that defined the mid-2000s. There are various explanations why stock has hovered at historic lows ever since. Construction is consistently down. Owners, according to NAR's Profile of Home Buyers and Sellers, live in their homes for nearly a decade, several years longer than prior to the 2008 bust.
After reaching a nearly eight-year high in December, at 4.55 percent, mortgage interest rates are now sliding, forging a more favorable financial outlook for buyers.
“The Federal Reserve has changed its policy from December to indicate it is going to be patient and the way to read that is to say that the Federal Reserve will not raise interest rates in 2019,” Yun says. “Hence, just change in that tone has led to a fall in mortgage rates.”
Mortgages also shift with the appetite for 10-year Treasury bonds. When risk grows, investors prefer safe, government-issued securities. As a result, prices shoot up and interest, including mortgage rates, goes down.
“Mortgage rates really start to fall – that is typically because investors are pulling their money out of other investments and putting them into bonds because they are worried about the market,” McLaughlin says.
The More, the Better
While home prices, sales, construction, stock and mortgage rates are all essential indicators for the real estate market, others also harbor insights. Household-formation and homeownership rates reveal prospective demand. So do job creation and wage growth. Student debt, which could affect purchasing power, is another useful metric, alongside buyers' changing preferences.
On the supply side, trade deals and building regulations impact construction, while financial and personal matters may motivate sellers.
Thus, no single indicator could divulge the complex entirety of the housing market. Rather, it is a constellation of many.
May 11, 2020
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