Housing Continues To Weaken

Weakness In The Housing Market

There haven’t been any new data points on housing in the past few days. No economic reports came out on Veteran’s day.

The next big reports will be the housing price index on November 19th and the starts report on November 20th.

Even though there isn’t new data, I have charts which shows existing data with new perspectives. The September CoreLogic report on home purchases has a lot of great metrics to review.

As you can see from the chart below, the home price index was up 0.4% month over month and 5.6% year over year in September.

CoreLogic expects future weakness as the October index is predicted to fall 0.6% month over month. The year over year growth rate in September 2019 is expected to be 4.7%.

CoreLogic expects a steady decline in year over year growth in the Case Shiller index in 2019 as well. CoreLogic has no reason to be negatively biased.

That’s just what could happen because homes aren't affordable. If there’s a recession, these estimates will be too optimistic.

Housing - Millennials Want To Buy, But Have An Affordability Problem

CoreLogic included a survey of younger millennials. This makes sense because they are going to drive housing demand in the next 5 years.

The most common age in America is 27. First time home buyers are usually in their lower 30s.

Home buying has been delayed a few years. But it will still occur if the economy holds up. It’s pivotal to recognize the trends, while understanding they aren’t destiny.

That's very good for the housing market in the long term that America has positive demographics. However, a lack of affordability or a recession can impact the timing of the spike in demand.

In the survey, 80% of young millennials said they will move in the next 4-5 years. A strong labor market is helping millennials get passed their high student loan debt and into a house.

A 20% down payment is no longer the norm. It’s not a big stretch to buy a home. That is, if they have a good job and live in a neighborhood with affordable housing.

While the overall housing market is overvalued, there are many pockets where housing is affordable. Housing is all about location.

Housing Value Map

As you can see from the map below, many cities and coastal areas have overvalued housing according to CoreLogic.

Housing in the Midwest is mostly either undervalued or normal. As you can see, the Las Vegas housing market is overvalued. The Las Vegas HPI was up 13.4% year over year in September.

Las Vegas is the strongest area of the country right now as Seattle has recently seen weakness in rate of change terms.

Getting back to the survey, 40% of young millennials are extremely or very interested in home ownership now.

That’s not a surprise because some young people will buy homes in their upper 20s. Not everyone is average. It’s probably not a good time for them to buy a house in terms of the valuations. But home ownership isn’t all about timing the market to find the best price.

If you don’t buy a stock for 1 year, nothing happens. Either you put the money in a savings account or buy another security.

However, if you wait 1 year to buy a house, you still need to live somewhere. Young millennials either need to pay rent for 1 year or live with their parents.

The only time I’d say waiting was a must regardless of your personal situation was during the housing bubble from 2005-2007. Housing may fall and it may become more of a buyer’s market soon. If you can afford a house, you should buy it.

64% of young millennials regularly follow home values in their local market. Even people who aren’t planning on buying a house now are still following the market.

Maybe those 24% are looking at the market and waiting for it to fall because it’s too expensive.

Finally, 73% of young millennials cite affordability as a barrier to home ownership. It's by far the highest out of any other age group. That’s not a surprise. Young people have student loan debt, lower incomes, and less time to save money.

The expensive housing market doesn’t help them.

Home Purchase Index

The Fannie Mae home price index also showed weakness in October.

As you can see from the table below, 5 of the 6 components fell. The one that didn’t fall was flat. The overall index fell 2 points from September. Net percentage of people saying now is a good time to buy a house fell 5 points to 21.

Those saying it’s a bad time to buy a house increased from 32% to 34%. And those saying it’s a good time to buy a house fell from 58% to 55%.

Housing -  Now Bearish On The Economy & Stocks?

Personally, I’ve changed my tune on the stock market. Housing weakness, global economic growth weakness, and tariffs contributed. Also, the hawkish Fed, and the fiscal stimulus wearing off contributed. The Dems are discussing raising the corporate tax rate.

They won’t be able to do that since they only control the House. However, it’s another negative potential catalyst that faces the market in 2020. They will be able to raise corporate taxes if they win the election that year.

Housing - Conclusion

Demographics are a positive tailwind for the housing market. I think young millennials will drive housing prices higher in the next cycle.

However, it looks like this housing upswing is over. Especially so in areas such as Seattle, Denver, San Francisco, and Las Vegas.

CoreLogic expects year over year growth to fall because of affordability challenges. If there’s a recession, the housing market will get much worse.

The Fed is sticking with raising rates even though the ECRI leading index is at a 139 week low. The market might force the Fed to stop hiking after December.

 

Spread the love

Comments are closed.