Q1 2020 US Housing Market

Q1 2020 State of the U.S. Housing Market

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 Year’s 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 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 steadily and has broken the record for the most consecutive months of positive GDP growth in recorded history.

The major U.S. stock indices reflect this high confidence level in the economy as both the S&P 500 and the Dow Jones reached record peaks in December. Bullish sentiments on the economy and the stock market mean households should feel optimistic about their financial futures.

Financial security and an expectation of increased prosperity in the short-medium term will help bolster the housing market as home sales increase.

The decision made by the U.S. Federal Reserve has also helped the housing market in 2019. After increasing the Fed funds rate and keeping it level, Chairman Jerome Powell moved to reduce the key rate twice.

The effective federal funds rate, according to the St. Louis Federal Reserve site,  now sits at 1.55%, down from its peak of 2.42% in April 2019. The chart below shows the changes in the rate over the past five years.

The Effective Federal Funds Rate 2015 -2019

The interest rate selected by the Fed is essential for the housing market because of the impact that this rate has on mortgage rates. Mortgage rates offered by lenders to home buyers typically move in the same direction as the fed funds rate.

So, as the fed funds rate has dropped, so has the speed that the mortgage companies and banks offer. All else being equal, there is a much greater incentive for prospective home buyers to buy a home if they know they have cheaper financing.

The chart below shows the average rate on a 30-year mortgage and how it has moved over the last five years. As you can see, a considerable decrease in mortgage rates over 2019 has occurred.

U.S. 30 yr Fixed Rate Mortgage Average

As we’ve just discussed, the macroeconomic factors that influence the housing market appear to be positive. However, ignoring the concerns that some economic commentators raised during the second half of last year would be negligent.

There were worrying signs that the escalation of the trade war between the U.S. 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 U.S. economy.

In addition to 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.

While the latter of these two issues has yet to be resolved, in recent months there have been tremendous strides in trade talks between the world’s two largest economies, which has helped significantly calm equity markets.

We shall now turn our eye to the specific housing market data. The most recent data to be released by the U.S. Census Bureau and the Department for Housing was for the month of November 2019. Sometimes, solid economic trends do not translate into positive news in the housing market. However, the press report released on Dec 23 indicated an extremely healthy need, as illustrated by year-on-year solid growth in residential home sales.

The chart below shows the data points for this vital indicator from the last five 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 habitually do not stay stable for too long. It is essential to close this note with some prescient thoughts on the outlook of the housing market going forward, with a particular focus on the potential risks.

Chief among these risks is no doubt the potential impact of the 2020 Presidential election. It will be essential 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 housing market’s strength today has come from the confidence that households and investors have in the economy. If it looked likely that a significant shift in economic policy was incoming in November of this year, then that confidence might be shattered.

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