Over the past few weeks, I’ve explained my position that there will not be a recession in the U.S. in 2019.
My first article explained my point from a production perspective. And my second explained it from a consumption perspective.
This time, I’m coming at it from the real estate market’s point of view.
Real estate is somewhat related to the overall health of consumer activity, but it’s big enough to be its own category.
The housing market has been estimated to comprise up to 20% of our gross domestic product. That includes consumer spending on homes, new home construction and spending on housing services.
If there’s demand for property and home values are rising, it implies that the economy is healthy.
One of the most fundamental things to look at when gauging the real estate market is whether or not people can actually pay their mortgages. If they can’t, that’s about as red of a flag as you can get that there’s something vitally wrong with the economy.
But right now, there’s no need to worry about that. The delinquency rate last quarter on single-family residential mortgages was the lowest in 11 years at 3.01%.
Of course, this is a huge part of what caused the last economic crash.
People were given home loans that their credit didn’t warrant, and then when they couldn’t pay them, they defaulted.
That began in early 2005, when the delinquency rate was 1.42%. By the end of 2007, it was up to 3.09%.
Then, people began losing a ton of money in the stock market, and they couldn’t afford their lifestyle anymore. The delinquency rate shot all the way up to 11.54%.
So, the fact that delinquencies have been in a steady downtrend since the end of 2012 is a great sign for the real estate market in general.
Right now, there’s a lot of panic echoing throughout the market about rising interest rates.
As anyone who’s bought a house knows, it’s best to buy when rates are low. If rates go up, mortgages go up, and people have less incentive to buy as opposed to rent houses.
And since about 34% of homes right now are sold to first-time buyers, rising rates can definitely have a negative impact on the market.
However, the data so far this year is about what you’d expect in an environment where interest rates have been raised six times in the past two years. Not to mention a possible seventh coming on December 19.
First, let’s take a look at the housing market situation from 2005 through 2008.
In 2005, there were about 100 million homes sold in the United States. That fell by 9.5% to 90.8 million sold in 2006, and then sales plummeted in 2007 to 69.71 million.
That’s a drop of 23.2% in just a year. And then sales fell another 7.1% in 2008 to 64.8 million homes sold.
So, to recap, there were just 64.8 million homes sold in 2008 compared to about 100 million sold in 2005. Home sales declined by 35% in three years.
The market today looks much different. In 2015, there were about 68.9 million houses sold. That grew to 74 million in 2017, and right now we’re on pace to see about 72 million houses sold this year.
Although there’s probably going to be a small drop this year, it’s nothing compared to what we’ve seen in recessions. And that’s considering the fact that we could see the seventh interest rate increase in two years. So I would say the housing market is looking extremely strong.
There’s also huge demand for starter homes that the market is not meeting.
As I previously stated, over one-third of homebuyers right now are buying for the first time.
Contributing to that is the fact that millennials are now starting to buy in huge numbers. About 36% of homebuyers are age 37 or younger.
However, only about 21% of the homes on the market are starter homes.
With the huge wave of millennials and first-time buyers flooding the market, we should see a ramp-up of homebuilding and starter home sales. That will boost the overall real estate market.
Thankfully, we’re starting to see the market respond to this huge demand. The number of homes available for sale right now are the highest so far in 2018.
Another boost we’re seeing is the number of housing starts. Since the beginning of 2017, construction has started on over 28 million new homes. That’s the highest two-year total since 2006 and 2007.
So, homebuilding companies are hard at work trying to meet the demand of young families and new buyers looking for their first homes.
Of course, the other issue that needs to be addressed is interest rates.
Although we haven’t seen any signs of a market disruption so far, that doesn’t mean the future will automatically be good.
If the Federal Reserve continues to raise rates, it could hurt the housing industry. However, recently the Fed has been a lot more cautious of raising rates at a fast pace.
On November 28, Fed Chairman Jerome Powell said: “Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy — that is, neither speeding up nor slowing down growth.”
He also said that it takes “a year or more” for interest rates to have an impact on the economy. So, it would make sense to wait a little bit after two years of constant raising before raising even more.
All of this suggests that there’s not much intent to raise rates much higher in the near future.
I’d also like to emphasize some of the positive things we’ve heard straight from management.
The most recent earnings season gives us firsthand insight into current business conditions. For insight into consumer-related activity, we can look to LGI Homes, D.R. Horton, PulteGroup and Toll Brothers.
These are some of the largest homebuilding companies in the world. In the past year alone, they’ve brought in more than $34 billion in sales.
Here are some things we’ve heard from management in their most recent quarterly earnings calls:
“We continue to see strong demand in traffic in our information centers from renters wanting to convert to home ownership, proving that buyer interest levels are still high.”
“We continue to see good demand and a limited supply of homes at affordable prices across all of our markets. Economic fundamentals and financing availability remains solid.”
“Based on industry dynamics, we maintain our positive view on the housing market and the overall sustainability of the current housing recovery.”
“There are many positive factors underpinning the broader U.S. economy that we believe are supportive of the housing sector longer term, and our affluent markets particularly. Household formations are increasing. The economy is growing. The nation is experiencing the lowest unemployment rate in many decades, and consumer confidence is near an all-time high.”
“I’m not here to predict how long these current market conditions will continue, except to say that it just doesn’t feel like a slowdown that will have a long duration because the fundamentals are strong, both with the macro U.S. economy and with the housing business.”
From the sound of these comments, you’d never think that those stocks are trading at 25% to 46% below their highs.
A Great Investment
The SPDR S&P Homebuilders ETF (NYSE: XHB), which holds 36 housing stocks, was trading 33.6% below its high back on October 29.
From that low point, it’s rebounded about 7.7% as of Friday’s close.
Overall, this down move in housing stocks has been greatly exaggerated.
The current state of the housing market doesn’t match up with a recession happening anytime soon.
This exchange-traded fund is a great investment. It lets you capitalize on the exaggerated fear surrounding the housing market.
Editor, Rapid Profit Trader