The Housing Market Is Cooling Off– Here’s Why

Not every economic downturn has catastrophic effects on the housing market—it may just feel that way in the post Great Recession world. Ralph McLaughlin, deputy chief economist at CoreLogic, recently spoke with Jim Puplava and listed three key factors contributing to the housing market's cooling and explained why, despite those, he remains bullish.

McLaughlin noted that homeowners, homebuyers, or really anyone who has skin in the game could be using the crash of 2007-2008 as a benchmark, harboring expectations that downturns are always as destructive to the housing market. Historically, the market tends to fair well during economic corrections or periods of low growth. According to McLaughlin, there’s no reason to panic right now, even if we may be headed for a recession. He said “we’re seeing a cooling of the housing market, but nothing that indicates a crash.”

What’s causing this cooling? McLaughlin explained you can’t pinpoint one exact reason; it’s a combination of forces acting together.

Housing Supply:

“The real elephant in the room here is housing supply,” McLaughlin said. Currently, supply for both new and existing housing units is at near-historic lows which is unprecedented this late in the economic cycle. Prior to the crash in 2007-2008, we were at near-historic highs of housing supply. This is an important element, McLaughlin said, because “if there are a lot of homes on the market and suddenly no one wants to buy them, you’ll get into a downward spiral of price competition.” Right now, however, we’re in the opposite situation, there isn’t an over-abundance of homes on the market.

Policy:

Policy has certainly played a role in the cooling of the housing market. Mortgage rates are part of this given their loose connection with the Fed short-term rate. “Now that rates have come back down,” McLaughlin said, “we’ve seen some signs that buyers are coming back a little but not enough to really move the needle.”

On the home sales side of things, this past December, many parts of the country saw an impressive drop in home sales, especially in high-cost markets like California. Some regions had decreases as high as 20 percent year-over-year. McLaughlin said this drop wasn’t from a pullback in demand or inventory but a matter of policy.

There was likely a rush of people trying to close home sales in December 2017 in order to be grandfathered into the mortgage interest deduction. The tax deduction pushed home sales into the end of 2017– sales that would have normally occurred in 2018. In December of 2018 there was no policy-propelled rush pulling more sales into December, thus creating a wave of price decreases. However, McLaughlin pointed out, “we have been seeing a pretty persistent drop in home sales on a year-over- year basis that was occurring well before December.” So, while policy certainly played a role in price decreases, it doesn’t shoulder all the blame.

Price Increases:

Housing supply and price increases are directly related. For the past seven- or eight-years housing prices have continued to significantly rise, outpacing incomes. This especially hurts first-time home buyers, who were acutely hit by anemic wage growth and troubling job market stability after the recession. McLaughlin said, “from an economic fundamental [perspective] we are seeing a supply-constrained environment that has put affordability pressures on home buyers, especially those that are in the first-time or trade up market who are younger home buyers.”

Despite these factors, McLaughlin remains bullish on the housing market. “There’s the natural life cycle of young people getting older and starting to do adult life things which include … buying a house and that’s a lot of potential inertia that could last indefinitely.” He cited the Joint Center for Housing Studies’ newly released household projections through 2030 and 2040 which predicts about 30 to 35 million new households entering the market. Each of those new households will need things like furniture, insurance and other housing services. McLaughlin said it’s for this exact reason that he’s “not bearish on the housing market,” despite its current cooling.

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Justine Hall

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Financial Sense® Wealth Management
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