If You Build It, Will They Come?
New and existing home sales recently hit their highest levels in more than a decade. The National Association of Home Builders Market Index, which measures homebuilder sentiment, hit a new high of 90 (out of 100 max) in November 2020, surpassing levels seen during the housing boom of 2005-2007.
But in the last few months these measures have softened and come off their peaks. Given that the housing market is typically an indicator of economic strength, a rollover in this data could be a sign that growth fears are founded. Or it could be that this recovery truly is different.
Not Enough to Go Around
The great migration from cities to suburbs helped fuel this cycle’s housing boom, bringing the monthly housing inventory to lows last seen in 2003. Naturally, this imbalance between buyers and sellers drives bidding wars and pushes prices higher. In fact, the S&P Case-Shiller US National Home Price Index rose 14.6% in April 2021 compared to one year ago. To put that in perspective, the last time home prices rose by more than 14% year-over-year was in the fall of 2005.
Another force putting upward pressure on prices was the rising costs of home building materials such as lumber and copper. Although well off their peaks in spring of this year, the move down in input costs has yet to filter through to home prices. Consumers have taken note and slowed their purchases—according to a report from Fannie Mae in June, only 35% of consumers think it’s a good time to buy a home.
The Canary in the Coal Mine?
Given all of this, one could speculate on the link between a cooling housing market and growth concerns in the US. One could also painfully recall what happened after the last housing boom and get nervous about what may lie ahead.
But I don’t think that’s necessary. First, this housing boom was a result of the crisis, not the cause. Second, it’s true that total mortgage balances rose in the first quarter of 2021 to $10.2 trillion, which is above the $9.3 trillion level seen in fall 2008. More importantly though, the average credit score of borrowers rose through this crisis, instead of falling like they did ahead of 2008—meaning the risk embedded in these loans should be lower. And third, today’s average 30-year fixed rate mortgage is carrying an interest rate of 2.98% vs. the average rate in fall of 2008 of over 6%.
Perhaps consumers and lenders learned their lesson in 2008. And perhaps that lesson was: don’t overspend and don’t overextend or it all falls down. Yes, the housing market is a cyclical indicator, and yes, the housing market has cooled of late. From an investment perspective, the biggest gains may have already been had. But I don’t see this cooling as an indication of danger. I see it as an indication of a smarter consumer.
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