Head of Macro Analysis, Saxo Bank Group
Summary: Geopolitical developments in Washington, London and Beijing have commanded a huge amount of attention is recent months and other fundamental indicators – most importantly, the US housing market – have been neglected. But US housing is a reliable harbinger of the overall economy and must not be ignored.
- US real estate market prices are hot again. The Case-Shiller national index has almost reached its pre-crisis level. New boom cities have appeared to replace Miami and Las Vegas. In some US cities, prices are up to 50% higher than their previous pre-Global Financial Crisis peak.
- The real estate slowdown is worrying considering that it is happening while consumer confidence is at its highest point. The main issue seems to be about affordability and the fear of higher interest rates.
- This is a bearish sign for the US economy since the real estate sector tends to be a leading indicator of the business cycle. It will have significant implications on the Fed's monetary policy in 2019 as real estate might replace the labour market as the main focus.
The US real estate market has fully recovered from the crisis
The Case-Shiller national index has almost reached its pre-GFC level. New boom cities have emerged to replace Miami and Las Vegas where housing prices are below their 2007 levels. In Boston, prices are 33% higher than their previous peak; Seattle and Dallas around 60% higher (chart 1).
The current slowdown is happening while consumer confidence is skyrocketing
There has been more and more evidence over the past few months of a slowdown in the housing market. The latest data confirm a US homebuilder’s sentiment drop to 60 points, its lowest level since summer 2016. Housing starts have notably slowed since last January, but the bulk of the weakness has mostly come from the multi-family space (chart 2).
The degraded conditions for buying houses are explained by affordability or the lack of thereof:
- 21% of US households mention high prices as a reason for not buying houses, the highest level since the end of 2006 (chart 4)
- 75% of households see higher interest rates in the next year, the highest level since early 2007 (chart 5)
- A mere 4% expect rates will go down (chart 6)
The US housing market is often a good leading indicator of the US economy:
- CME lumber, which is a good barometer of the construction sector and, also, a leading indicator of the US economy, has sharply fallen since last spring (chart 7)
- Residential investment, which has consistently and significantly contributed to weakness before the recessions, has marked its third straight quarterly decline since late 2008/early 2009 (chart 8)
So far, the market has paid very little attention to the acceleration of the slowdown in housing since investors have been too busy scrutinising the latest geopolitical developments on both sides of the Atlantic. This is, however, a major evolution which constitutes another signal that the US is at the end of the business cycle and that we should expect lower growth in 2019.
This slowdown will have deep implications on the Fed monetary policy as higher rates pose the risk of putting housing into a recession. Home buyers are not used to such high mortgage rate – now close to 5% (chart 9). If this negative trend continues, it will weight on the Fed's hiking path and push for a more dovish tone after a December hike.
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