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Written by: Tim Pierotti
We have often made the case that as the housing market goes, goes the US economy. Well that makes the outlook for the economy pretty damn murky given all the conflicting data in housing. We add up the below positive and negative factors and see an economy that is still slowing but not on the cusp of a recession. Ultimately, we still see more buyers than sellers in housing.
That kind of environment is probably just fine for risk assets like equities. Valuations are too high and so are expectations, but it will likely be risk-on until there is a meaningful negative catalyst.
Bullish
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New Starts are reaccelerating.
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Retail Sales of building materials also reaccelerating.
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Renewal rent growth is still running around 5% among the public companies in the multi-family market.
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The generational wealth transfer – According to Zelman & Associates, roughly 1/3 of all home buyers have received some form of downpayment assistance from a family member. That trend will likely only accelerate as the Boomer generation passes along more and more assets. Do not sleep on the importance of this dynamic.
Bearish
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Builder sentiment continues to decline (NAHB – National Assoc. of Home Builders down 4 straight months) as pricing softens and in the new home market and inventories rise in states like Florida and Texas
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The existing home market remains in stasis and that is likely to continue as owners are loathe to give up 3% and 4% mortgages.
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HD lowering its comparable store guidance from 1% to 3%-4% tells you that the low existing home turnover is impacting housing investment. Low turnover also hurts real estate brokers, mortgage brokers, title insurance people, pickup truck sales…
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The recent drop in mortgage rates has, so far, not generated a meaningful improvement in mortgage applications.
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Affordability is the worst it has been in forty years. (affordability can remain bad for a very long time)
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Some softness in new rent growth suggesting that some parts of the country have added too much rental inventory. It’s already much cheaper to rent than own.
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The labor market is weakening modestly. Wage growth is decelerating. History strongly suggests that modest unemployment growth tends to be followed by recession and significant unemployment growth. (We nervously still think this time is different for employment fwiw.)
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Cost of ownership is rising. Homeowners insurance (Florida and California especially) maintenance, and property taxes all rising.
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US consumer demand isn’t rolling over and neither is inflation. Therefore, don’t expect more rate relief.