The housing market seems to be in a bit of a muddle these days. Should we be worried?
More than just a place to lay your head, housing is generally both a valuable asset and a tool for building wealth. And the health of the broader housing market matters a lot to the economy.
Rising home prices can make homeowners feel more optimistic about spending and investing. A strong market can also spur job-creating construction, demand for raw materials and a need for loans in the form of mortgages. These good vibes and increased activity can radiate outward through the economy, helping to drive growth.
But there’s a flip side: A weak housing market can be a drag on growth.
“Housing is what we call a leading indicator: It can signal future turning points in the economy before they actually show up,” says Liz Ann Sonders, Schwab senior vice president and chief investment strategist. “And even with all the good news out there for unemployment, wages and the stock market, the recent data from the housing market is sending some negative signals. It’s not all bad, of course, but it’s still worth watching.”
Here’s what the data tell us:
- After years of above average growth, sales are slowing. After plunging following the financial crisis, home sales bounced back and delivered several years of strong growth—but the trend seems to be softening. Sales of new homes are now below their March peak and sales of existing homes have been weakening for months, according to National Association of Realtors data.
- Prices are high and rising, though more slowly than in the recent past. Rising prices are good for homeowners, of course, but a problem for anyone trying to buy a home. Overall, homes are less affordable today than they have been in about a decade, according to National Association of Realtors data. Rising interest rates don’t help with affordability.
- Supply is also tight. Census Bureau data showed construction starts on new housing units picked up in August after plunging earlier in the summer, which is positive, but the number of new building permits has been falling. Because permits are issued before construction starts, this could mean that although things are ok now, there might be less construction in the pipeline going forward. Also worth noting: Both measures of construction activity are below their historical average before the financial crisis. The result is low inventory, especially of smaller and less-expensive homes, which has helped keep prices high.
- Homebuilder sentiment is deteriorating. A widely watched survey of homebuilders— the NAHB/Wells Fargo Housing Market Index (HMI)—showed that confidence among builders has faltered. More survey respondents now describe conditions as poor than as good. And builders remain concerned about rising material costs—exacerbated by the recent imposition of tariffs on imported goods such as steel—as well as limited construction labor supply and lack of buildable lots.
In other words, sales are slowing as prices rise and homes become less affordable. But weaker demand may actually be a drag on one of the things that could help make homes more affordable—a surge in supply.
There’s still much to cheer, of course. The economy is humming along, the stock market is at historic highs, unemployment is at historic lows, and wages are finally starting to perk up. Those factors could actually help the housing market going forward.
And keep in mind that conditions in the housing market aren’t uniform.
“Back when the housing bubble was inflating and then again when it was deflating, it might have made sense to think in terms of a single, monolithic market. But that’s no longer the case,” Liz Ann says. “Housing is now more of a local story than a national one, and fundamentals vary by region.”
However, shifting trends in the housing market could still signal trouble to come.
“Housing starts are an example,” says Liz Ann. “Historically, housing starts have peaked a median 22 months before a recession. If it turns out that starts peaked back in the spring, the countdown may have begun.”
“Another thing to note: Thanks to the bull market in stocks, equities now account for a bigger share of household net worth than real estate. This has happened only a few times in the post-WWII era,” she adds. “Because it’s so rare, we can’t say this situation is a recession indicator. But recessions did follow the previous two cases, in the late 60s and 2000.”
That said, Liz Ann believes the economy has room to grow and the road to the next recession is still fairly long. But she’ll be keeping an eye on the data.