Hello Housing Market readers!
As we kick off a brand new decade, it's a great time to take a fresh look at where our housing market stands. While it might be a bit late for New Year's resolutions, it's never too late to learn from the past year and adjust to what's happening now.
With that in mind, let's dive into the state of things as of January 2020.
Positive Signs on the Macro Level
Good news! On a broader scale, there are lots of encouraging signals for the health of the American real estate market. The U.S. economy is still growing strong, even breaking records for the longest streak of positive GDP growth in history.
Our major U.S. stock indices are reflecting this confidence, with both the S&P 500 and the Dow Jones hitting record highs in December. This bullish sentiment means households should feel pretty optimistic about their financial futures. And when people feel financially secure and expect more prosperity, it really helps boost the housing market as home sales tend to increase.
The U.S. Federal Reserve also played a helpful role in the housing market in 2019. After initially raising and then holding the Fed funds rate steady, Chairman Jerome Powell decided to lower it twice. According to the St. Louis Federal Reserve, the effective federal funds rate is now at 1.55%, down from its peak of 2.42% in April 2019. (You can see the changes over the last five years in the chart below!)
Why is this important for housing? Because the Fed's interest rate directly influences mortgage rates. Typically, when the Fed funds rate drops, so do the mortgage rates offered by lenders to homebuyers. So, with cheaper financing available, there's a much bigger incentive for prospective buyers to jump into the market. The chart below illustrates how the average 30-year mortgage rate has significantly decreased over 2019.
Addressing Concerns
While the macroeconomic factors look positive, it would be a mistake to ignore some concerns that popped up in the second half of last year.
There were some worrying signs that the escalating trade war between the U.S. and China could seriously slow down growth for both countries, and even the global economy. As tensions seemed to rise from the White House, some investors did get a bit nervous about the possibility of a global recession and its impact on the U.S. economy.
On top of the US-China trade war, Europe also showed some concerning growth figures, with major economies in the region appearing to slow down.
Good news on one front: while the European economic slowdown is still a work in progress, there have been huge strides in trade talks between the world's two largest economies recently, which has really helped calm equity markets.
Looking at the Housing Market Data
Now, let's turn our attention to the specific housing market data. The latest numbers from the U.S. Census Bureau and the Department for Housing (for November 2019) show some great news! Sometimes, strong economic trends don't always translate into positive housing market news, but a press report released on December 23 indicated an extremely healthy demand, with solid year-on-year growth in residential home sales.
The chart below highlights this vital indicator's data points from the last five years. As you can see, the second half of 2019 saw home sales grow at an impressive rate.
Overall, despite a dip in the middle of the year, the trend for 2019 was incredibly positive—a marked improvement over the steady decline we saw in 2018.
What's Next? Potential Risks Ahead
Of course, markets rarely stay stable for long. It's crucial to end this update with some forward-looking thoughts on the housing market's outlook, especially focusing on potential risks.
Chief among these risks is undoubtedly the potential impact of the 2020 Presidential election. We'll need to keep a close eye on who the Democratic nominee will be. If a more progressive, liberal candidate with a fairly radical, socialist agenda is chosen, it could significantly spook markets.
As we mentioned earlier, much of the housing market's current strength comes from the confidence households and investors have in the economy. If it looks like a major shift in economic policy is on the horizon this November, that confidence could be shattered.
In Closing...
The U.S. housing market is starting off this new decade on solid ground. The trends for 2020 look positive, suggesting we should continue to see a robust and healthy market that keeps on growing!
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