Source: (T) Bloomberg, BEA, Federal Housing Finance Agency. (L) U.S. Census Bureau. (R) Macrobond.
We see a housing sector that is decelerating along with the rest of the economy, not collapsing. Much has been made about weakening demand for housing, and residential investment has been a drag on GDP for six of the last seven quarters. Rising mortgage rates dampened demand for housing in 2018, though rates have now fallen significantly. Meanwhile, increasing input costs have pinched homebuilder profits and could continue to weigh on new construction.
A key support to this critical sector is that the consumer remains in solid financial shape. With wage gains at their highest during this expansion and debt levels manageable, demand for housing doesn’t look ready to fall off a cliff. Nevertheless, housing data has been exceptionally rocky. Existing home sales saw both the lowest sales in three years in January and the biggest month-on-month recovery in February. Existing home sales have averaged 5.38 million units over the past four years, and we see low mortgage rates supporting this level of activity in Q2.
There is an inventory story developing as well. Housing supply on the market recently hit a multiyear high of 4.4 months. This is a low level historically but is a critical indicator that we will be watching going forward. In particular, a look at “homes contracted but not yet under construction” shows a rising disparity between homes already sold and those for sale. This gap is now the widest since early 2008, a sign that supply may be starting to outpace demand.
We believe that while housing prices will likely continue to level off and inventory pressure may add additional headwinds to home price appreciation, we are not in the early stages of another housing collapse. Demand has moderated in part due to an increase in mortgage rates, but rates have recently fallen to 18-month lows. The main risk for the sector is that consumer financial conditions deteriorate – for example, from decelerating wage growth or a wealth shock that stunts demand. While this would result in a downturn, the current market doesn’t approach the type of oversupply that marked the 2008 housing collapse.
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