Is The Housing Slowdown A Correction Or A Crisis?

The U.S. housing market is slowing down. As FreightWaves reported in the August economic roundup, housing data fell short of expectations from both supply and demand sides, as tight inventory and rising mortgage rates contributed. Homebuilders have struggled in recent months from labor shortages and rising materials costs, which has affected profitability. With the recent chatter of a housing crisis and the market possibly reaching a peak, we decided to take a closer look at what's going on right now.

It's taken the better part of a decade, but overall home values have rebounded. In fact, so much so that people who want to buy a new home are now finding themselves priced out of the market. There are too few homes, too many would-be buyers.

Business Insider calls it "an ugly detail," about the housing market. Residential investment, which includes construction and brokers' fees, shrank again in Q2 for a third quarter out of four. Business Insider also sources Lindsey Piegza, the chief economist at Stifel, saying the housing market "raises a large red flag" about economic growth in the second half of the year.

Why? Because "home sales help drive other parts of the economy, including consumer confidence and the pace of construction."

So, has the market peaked for the cycle, and if so, is it an economic indicator signaling a "crisis," such as NPR recently called it? No doubt, home construction per household is now at its lowest levels in nearly six decades, according to researchers at the Federal Reserve Bank of Kansas City. And it's also true that it's not just limited to SF in the west or NYC in the east, where home prices and rents have shot up. It is also a problem in mid-size, fast-growing cities like Des Moines, Durham, and Boise. In Boise, an analysis by the U.S. Department of Housing and Urban Development showed there is a demand for more than 10 times the number of homes being built right now.

Jonathan Miller, CEO of the real-estate appraiser Miller Samuel, writes in a newsletter that "we have officially arrived at a moment in housing nationwide." According to Miller, sales in both the high and the low ends of housing were slowing for different reasons. Luxury-home sales in major markets including Manhattan, Los Angeles, and the Hamptons have cooled amid uncertainty about the effects of the new tax law. At the cheaper end, the market has "crossed an affordability threshold" after many years of increasing prices, low inventory, slow wage growth, and now, rising mortgage rates.

Economists often caution against drawing broad conclusions from monthly housing data because it's volatile and often revised, FreightWaves chief economist Ibrahiim Bayaan has pointed out. But for several months now, the trend of many key indicators has been downward.

Home prices in Washington state rose nearly 4 percent in Q1, the most in the nation, and more than 13 percent from one year ago. In light of that, FreightWaves reached out to Hakan Ekstrom, principal of Wood Resources International, based in Washington state. Esktrom sees it as a slowdown, not a crisis.

"Maybe we'll see some dramatic increases in the housing issue in the big cities, but that's not across the country," he says. "There'll be less demand in the lumber market as compared to what we've seen in the past."

NASDAQ shows how the price of lumber has been dropping from its historic highs over June and July.

"The last two months housing starts have slowed down, and therefore demand for lumber has slowed. You've actually seen lumber demand soften after some super big increases. The supply scene has changed a little bit. The housing and construction sector has simply slowed."

"At some point you simply don't have enough people out there who can pay for these expensive houses. People are starting to be slightly less optimistic now that there are trade wars and higher interest rates and other high costs. And salaries aren't growing in parallel," says Ekstrom. "The inventory situation has started to change, actually. It depends on where you're talking about, but the construction is starting to catch up. There are bigger inventories in June and July. It's starting to spread. You're starting to see more inventory."

"Things are slowing because things just have to. The economy has been doing well now for about the past nine years," Ekstrom adds.

SONAR data tracking residential home building permits shows a sharp falloff for all of 2018's Q2.

Experts say the housing market is vulnerable to rising interest rates, job losses due to tariffs, and local policies against development. While we're not seeing job losses due to tariffs yet, we have seen falloffs for new building, and a continued saturated job market, in which construction workers are being paid excellent wages in an effort to keep up with demand.

SONAR data shows a consistent rise for average hourly pay in construction over a five-year average. Wages remain high as the general economy remains stout with unemployment at historically low levels.

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