Everywhere you look, concerns about the housing market seem to be growing.
Housing investment peaked at the end of 2017 and has fallen since. Nobel Prize-winning economist and New York Times columnist Paul Krugman recently said housing was "an additional reason to be concerned about the economy." And recent news reports have raised similar concerns.
But these concerns are wildly exaggerated. Contrary to the fluctuation, the US housing market is actually normalized, and it is mostly a positive development for the US economy.
Home buyers respond to lower interest rates
Contrary to some judgments, lower interest rates provide a boost to the housing market, especially for home sales. Mortgage rates jumped sharply in 201
In addition to the fall in interest rates, two other idiosyncratic problems for the housing market are fading.
First, despite the reduction in interest rates, house prices did not really fall until late last year, which has led to a delayed accumulation of home buying activity. Second, the changes in the tax code made by the Tax Cuts and Jobs Act, which limits mortgage interest rates and state and local tax deductions, hit the high-end housing markets.
Now that interest rates are falling and the other problems facing the market are disappearing, home buyers are responding as you expect: They buy more homes.
Pending home sales – which represent signed contracts on existing homes, and are therefore considered a leading indicator – have reached their best levels since mid-2017. New home sales, which also represent signed contracts, have been uneven in recent months , but has climbed around 15% so far this year.
Similarly, mortgage loan applications are about 15% up from the high mortgage rates last year. Note that low prices in all these series coincided with high interest rates late last year.
Consumer sentiment around the housing market has clearly also turned. The Fannie Mae Home Purchase Sentiment Index, which has proven to be a useful input to predict housing activity, recently jumped to a cycle high. According to the Conference Board, purchase intentions for new homes have exploded to levels not seen since before the financial crisis.
It would be one thing if consumers did not feel better about buying a home after a sharp fall in mortgage rates, but that does not seem to be the case today.
The housing market is getting back to normal
The main story of the housing market is one of normalization. A popular trope in recent years has been the lack of first-time home buyers. Housing has largely been backed by investors and cash deals, or as the story goes. This is really yesterday's story.
Look at the resale market. As of June, first-time buyers accounted for 35% of total resale purchases, the highest since at least 2011. All cash agreements and investor purchases have seen their share of total purchases. Necessary sales are down and conventional sales are up.
Similarly, the sales mix has taken a turn for the better.
Early in the recovery, when many properties were in need, sales of existing homes rose. Normally, home sales run about five times in relation to new homes. In the years following the recession, existing sales were about ten times above the level of housing sales. As the distressed property cleared and sales of new homes picked up, the composition of the sale in the housing market looks much closer to normal.
Of course, there are some reasons to be concerned about housing. For example, the spread of mortgages has widened – that is, interest rates have not gone down as much as the Treasury provides, indicating that consumers have not seen a good portion of the recent fall in the Treasury market.
Of course, this is not uncommon, and we are still skeptical that banks are aggressively tightening lending standards. Banks usually take a few weeks before giving lower prices to consumers, although this spread is noticeable.
The stock market does not buy the concerns of the housing market
For investors, an economic view is only useful insofar as it is combined with a view of the financial markets. Many of those who express a bearish view on housing have been doing so for months now. How did it work? Not good.
Despite concerns about the housing market, home-build shares have been going well. Since the high mortgage rates last year, the S&P 1500 home index sub-index has outperformed the broad equity market by about 30 percentage points. Even home improvement retailers such as Home Depot, which is part of a shuttered sector, have underperformed modestly since last fall.
Bearish economic commentators are welcome to comment on the housing market. Markets are welcome to ignore them.