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Q1 2020 State of the U.S. Housing Market

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As we embark on the start of a new decade, it seems like an appropriate time to take stock of where we are currently sitting with regard to the housing market. It might be too late to come up with some New Years resolutions but it is never too late to reflect on lessons learned during the past year and try to adapt to the current state of the market. With that objective in mind, let’s take a look at how things are sitting as of January 2020.

On the macro level, there are a lot of positive signals for the health of the American real estate market. The U.S. economy continues to grow at a steady rate and in fact has broken the record for most consecutive months of positive GDP growth in recorded history. The major U.S. stock indices reflect this high level of confidence in the economy as both the S&P 500 and the Dow Jones reached record peaks in December. Bullish sentiments on the economy and in the stock market mean that households should also feel optimistic about their financial futures. Financial security and an expectation of increased prosperity in the short-medium term future will help to bolster the housing market as home sales increase as a result.

The decision made by the  US Federal Reserve have also helped the housing market in 2019. After a period of increasing the fed funds rate and then keeping it level, Chairman Jerome Powell  made the move to reduce the key rate twice. The effective federal funds rate, according to the St. Louis Federal Reserve site,  now sits at 1.55%, which is down from it peak of 2.42% in April 2019. The chart below shows the changes in the rate over the past 5 years.

The Effective Federal Funds Rate 2015 -2019

The interest rate selected by the Fed is important for the housing market because of the impact that this rate has on mortgage rates. Mortgage rates offered by lenders to home buyers normally move in the same direction as the fed funds rate. So, as the fed funds rate has dropped, so too has the rate that the mortgage companies and banks are offering. All else being equal, there is a much greater incentive for prospective home buyers to buy a home if they know that they have cheaper financing available to them. The chart below shows the average rate on a 30-yr mortgage and how it has moved over the lat 5 years. As you can see, there has been a huge decrease in mortgage rates over 2019.

U.S. 30 yr Fixed Rate Mortgage Average

As we’ve just discussed, the macro economic factors that influence the housing market appear to be positive. However, it would be negligent to ignore the concerns that some economic commentators raised during the second half of last year. There were worrying signs that the escalation of the trade war between US and China would severely dampen the growth prospects of both countries, if not the whole globe. As the brash rhetoric disseminating from the White House seemed to be increasing tensions, some investors did get panicky about the prospects of a global recession and the impact that this would have on the US economy. In addition the the US-China trade war, there were also some worrying growth figures coming out of Europe as the major economies in the region looked to be experiencing slowing growth themselves. While the latter of these two issues has yet to be resolved, in recent months there have been huge strides made in trade talks between the world’s two largest economies and this has helped to calm equity markets greatly.

We shall now turn our eye to the specific housing market data. The most recent data to be released by the US Census Bureau and the Department for Housing was for the month of November 2019. Sometimes, strong economic trends do not translate into positive new in the housing market. However, the press report released on Dec 23 indicated an extremely healthy market as illustrated by strong year-on-year growth in residential home sales. The chart below shows the data points for this important indicator from the last 5 years.

U.S. New Residential Sales 2014-2019

As the chart illustrates, the second half of 2019 saw home sales grow at an impressive rate. Looking at the year as a whole, we can comment that despite the drop off in the middle of the year, overall the trend was incredibly positive, and a marked improvement over the steady decline that we saw in 2018.

Of course, markets have a habit of not staying stable for too long. It is important to close this note of with some prescient thoughts on the outlook of the housing market going forward, with particular focus on the potential risks. Chief among these risks is no doubt the potential impact of the 2020 Presidential election. It will be important to keep a close eye on who the Democratic nominee will be for the election. If one of the more progressive, liberal candidates is chosen on a fairly radical, socialist agenda then this will probably spook markets considerably. As we highlighted above, much of the strength of the housing market today has come from the confidence that households and investors have in the economy right now. If it looked likely that a large shift in economic policy was incoming in November of this year, then that confidence might be shattered.

In closing, the US housing market is starting off the new decade on a strong footing. The trends looking forward are positive and indicate that 2020 should continue to see a robust and healthy market that continues to grow.

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