Ninety percent of all millionaires become so through owning real estate.
– Andrew Carnegie
There are a lot of theories going around the housing market. Some analysts are bullish, some bearish, and some neutral. So, I figured it would be a productive exercise to analyze the residential housing market by correlating recent data published by different sources such as NAHB, NAR, and the Census Bureau.
The data published in May 2020 is negative but the news is not all bad. It is almost on the lines that I had anticipated in early-May 2020 when I had reported in The Lead-Lag Report that low 30-year mortgage rates would spur activity in the housing sector. That said, the COVID-19 situation is evolving and we don’t know what will happen in the next 60 days as states begin to reopen in the middle of the pandemic. Therefore, all my predictions here are valid for the near term.
Image Source: Twitter
Back to the housing data now – yes, the numbers are negative but not as bad as the analysts had estimated. Let’s dig in deeper.
The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI)
Image Source: NAHB
The NAHB/Wells Fargo HMI represents three indices – It is a weighted average of the Present Single-Family Sales Index, the Single-Family Sales for the Next 6 Months Index, and the Traffic of Prospective Buyers Index. The HMI has recovered to 37 in May 2020 after crashing to a low of 30 in April.
But the road ahead isn’t smooth because the HMI was at 72 in March 2020 and it will take some time for it to reclaim that slot. Also, HMI above 50 is considered a positive sign, so the present data are still in bear territory.
The uptick also could be because housing was marked as an essential service and work in this sector was allowed, though it may not have functioned at full throttle. Data are likely to be better in June 2020 as many states begin to reopen.
It also is interesting to note that the northeast region underperformed while the west was the best performer. Image Source: NAHB
Housing Starts and Building Permits
The count of housing starts begins as soon as work begins on the foundation/footings. Housing starts impact a variety of activities such as the acquisition of raw materials required for construction, actual construction activity, mortgage, and other activities related to real estate. New building permits issued reflect consumer confidence and a sign of things to come for the real estate sector.
Image Source: Census.gov
Building permits came in at 1,074,000, which was 20.8% below the March 2020 number of 1,356,000, but higher than the consensus estimate of 996,000.
The data are not as bad as they appear because of the following reasons:
(A) The drop in numbers in April was because the COVID-19 restrictions ensured that the sector operated at reduced capacity.
(B) Mortgage applications have increased week over week as per data released on May 20, 2020.
(C) Ian Shepherdson of Pantheon Macroeconomics says that job losses have mainly impacted the younger and lower-paid workers – and these folks would not be shopping for new homes anyway.
Existing-home sales are an important indicator because such sales account for more than 90% of all home sales. The National Association of Realtors reported that existing-home sales dropped 17.8% in April 2020 because of the COVID-19 disruption. Analysts had estimated the number to drop by 18.9%.
It represented the largest month-over-month fall since July 2010. However, median existing-home prices for all housing came in at $286,800, considerably higher than the April 2019 number of $267,000.
Low-mortgage rates, unemployment numbers, and the length of the COVID-19 disruption will be the key drivers of this market going forward.
The record-low mortgage rates will continue enticing homebuyers and data for May and June are likely to get better because states have begun to reopen and activity is expected to increase.
However, the virus situation is evolving rapidly, and if there is a second wave, it will hit the economy very hard. We should know about any recurrence within the next one month because states have just started to reopen. Unemployment numbers of folks in the higher income bracket also will be a key indicator to watch.
In the very near term, housing stocks and residential REITs can perform. However, in the medium and long terms, the situation is very fluid, the jury is still out, and I would just make my investment capital stay-at-home.
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