In This Article:
The housing market has been cooling down, but there’s no need to panic.
U.S. homebuilding rose in October, led by multi-family housing projects. Single-family homebuilding, however, fell for the second month in a row, decreasing 2.6% year-over-year — the largest drop since March 2015.
Meanwhile, existing-home sales increased 1.4% in October from the previous month. But sales are down 5.1% from a year earlier, representing the largest annual decline since 2014.
“Given the rapid increase in home prices over the past few years, and the recent pick-up in mortgage rates, the housing market continues to struggle with diminished affordability. The notable deceleration in median home price growth, 3.8% in October compared to roughly 6% in 2017, is a positive sign, as it indicates that home prices are rising at a more sustainable pace,” according to Mortgage Bankers Association Chief Economist Mike Fratantoni.
But as Nobel laureate Robert Shiller has pointed out, the market has been overheated since 2012. And he has been getting flashbacks of 2006.
‘Expect a soft landing’
Economists across the board find that the looming housing crisis has been blown far out of proportion.
In a note to clients, Credit Suisse wrote, “We are not optimistic on housing, but the level of concern has become excessive,” citing accelerating income growth and low vacancy rates.
“The most likely scenario for housing is a soft landing, not a recessionary slowdown. With fiscal stimulus and a strong labor market boosting growth, the Fed should take comfort that rate hikes have traction slowing part of the economy. Rather than cause a recession, some managed weakness in housing may actually prolong the current recovery,” according to Credit Suisse.
Home price growth in September slowed for the sixth month in a row, reaching its lowest level since January 2017, and there’s no questioning the market’s downward trend. Still, Goldman Sachs believes that national average price appreciation will remain positive overall. In a recent note, Goldman reiterated its belief in a “soft landing,” pointing out that housing supply is still at historically low levels.
Another important point is that the price growth in the U.S. over the past six years does not necessarily indicate overvaluation. “The low supply of housing going into the current slowdown, combined with high but not unsustainable valuations, suggests to us that house price appreciation in the U.S. is poised to decelerate but not turn negative in 2019,” according to Goldman.
Higher rates on the horizon
Of course, higher interest rates will be headwind for the foreseeable future. The Federal Reserve has raised rates three times in 2018. And it is expected to do so again in December, and four more times in 2019.