Jonas Goltermann, Developed Market Economist at ING, suggests that it was a mixed month for US housing data, but the overall direction remains upwards and the key question now is, for how long will this trend continue?
Key Quotes
“Several key data for the US housing market pointed downwards in April. Sales of both new and existing homes fell relative to March, and by somewhat more than consensus expectations. New home sales in previous months were also revised down. Pending homes sales also fell by 1.3% month on month, again well below consensus, indicating sales are likely to slip further over the next couple of months.”
“At least the construction of new homes is increasing at a brisk pace. In April, new starts and new building permits fell slightly compared to March. But that was largely due to upwards revisions to the March data, as actually the data release was positive news. Compared to a year ago, new construction is increasing by nearly 10%. That means supply should eventually start to catch up with demand.”
“The current lack of supply coupled with robust economic growth and wage growth is also pushing up prices.”
“Taking a step back, the obvious question is how long these trends can persist. After all, we know from history that house prices can’t keep rising faster than wages indefinitely. And when house price growth slows, it is often an indication that the economy will slow down as well.”
“The current pace of house price increases is actually fairly modest compared to previous peaks in price growth, which suggests the turning point could be some way off.”
“The other key piece of the puzzle is supply. For house prices to decline meaningfully, there needs to be an excess of houses for sale relative to buyers willing and able to pay for them. Despite the healthy pace of housing construction and deteriorating affordability, such a situation looks like it is some way off.”
“Even if construction continued to increase at a very robust 10% YoY rate (which is improbable), new construction wouldn’t match the 2006 peak until mid-2023.”
“On balance, we don’t think the US housing market is about to turn south just yet. The most plausible scenario is that house prices continue to rise at a decent clip while construction grows fairly rapidly for at least another year or two.”
“But as a baseline forecast, a broad-based downturn in the US housing market looks more likely to be a story for the second half of 2019 or 2020. By coincidence, that is also a probable time frame for the US yield curve to invert, another powerful signal of a coming recession.”
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