U.S. Housing Market

Susan Jung |

The housing market over the last several years has been very strong with multiple offers for properties. However, house prices have begun to stall and multiple offers in most areas are less prevalent. There are exceptions. In Northern California, areas significantly impacted by the tech economy continue to see stronger demand. Other areas throughout the United States, however, have seen a slowdown in home purchases and this will have an impact on the overall US economy.

We expect the slowdown in housing market to continue. We don’t expect a collapse, but we do expect softness after a strong run-up in housing demand and prices. This will have consequences for the US economy overall.

A recent CNBC article highlighted the slowdown. In this article they stated:

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Lower mortgage rates should have given home sales a boost in January, but they did not. Sales of existing homes fell 1.2 percent to their lowest level in three years compared with December and were a wider 8.5 percent lower annually, according to the National Association of Realtors.

That could be good news for buyers seeking relative bargains in the spring.

Real estate agents and analysts have long been blaming weak sales on too few listings and rising rates — but supply has been rising steadily for several months and rates have been falling. Total housing inventory at the end of January increased to 1.59 million, up from 1.53 million homes for sale in December. Supply is also up from 1.52 million a year ago.

Home prices are still higher compared to a year ago. The median price of an existing home sold in January was $247,500. But that is just 2.8 percent higher compared with January 2018, the smallest annual gain since February 2012.

"Existing home sales in January were weak compared to historical norms; however, they are likely to have reached a cyclical low," said Lawrence Yun, chief economist for the NAR. "Moderating home prices combined with gains in household income will boost housing affordability, bringing more buyers to the market in the coming months."

Source: February 21, 2019 CNBC article, edited by Diana Olick

End quote

What is important to note about housing price softness is that sometimes it is an indication of the future health of an economy. Historically, a slowdown in real estate demand indicates an overall slower future economic growth rate.

What are the consequences in the United States from a slowdown in real estate prices and demand? 

It is our view that the real estate market is sending a signal that the economy is growing slower than many have expected. The Federal Reserve was pounding the table about increasing interest rates because of an overheating economy. Lately, the Federal Reserve is talking about slowing the pace of rate increases because of concerns about economic growth

As a result of a slowdown in the economy (as well as a softness in real estate prices), we expect interest rates to remain fairly low. Furthermore, because companies have already taken advantage of lower tax rates, the likelihood that earnings surprises on the upside has decreased. This has an impact on equity prices as capital values are directly related to earnings acceleration. This acceleration slows if profit growth is impacted by the overall economy.

We continue to assess the odds of a recession are moderately low. We believe a recession is less likely than some have suggested in 2019. But an economic slowdown does appear to be likely and one should factor this into their investment strategy. 

Fixed income is likely not a problematic asset group as interest rate increases that are lower than previously expected will likely lead to less capital negative fluctuation. Additionally, equities benefit from lower interest rates. However, a slower growth rate means slower corporate earnings which is why a slowdown in the economy is a mixed outcome for equity assets. Commodities likely will be under pressure as a global growth slows; demand will be impacted.

We continue to analyze economic conditions and adjust as needed. We analyze economic conditions and make projections about what the future may look like for the US and global economy. We will continue to adjust as needed based on our perspective on housing prices, economic growth, and corporate earnings.

If you have any questions about this information, please let us know, always happy to help.

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