Everywhere you look, concerns about the housing market seem to be mounting.
Residential investment peaked at the end of 2017 and has declined since then. Nobel Prize-winning economist and New York Times journalist Paul Krugman recently declined that housing was "an additional cause for concern for the economy." And recent news has raised similar concerns.
But these fears are wildly overblown. Contrary to the grip, the US housing market is actually normalizing, and this is a mostly positive development for the US economy.
Homebuyers respond to lower interest rates
Contrary to some fates, lower interest rates provide an uptick in the housing market, especially for home sales. Mortgage interest rates jumped sharply in 201
In addition to the fall in interest rates, two other idiosyncratic problems for the housing market are fading.
First, despite the reduction in interest rates, housing prices did not really intrude until late last year, which led to a delayed recruitment of home buying activities. Second, changes to the tax code made by the Tax Relief and Jobs Act, such as restrictions on mortgage interest rates and the deduction of state and local taxes, are likely to affect the highest housing markets.
Now that interest rates are dwindling and other problems facing the market are dissipating, homebuyers are responding as you would expect: They are buying more homes.
In anticipation of home sales – which are signed contracts for existing homes and are therefore considered a flagship – they have advanced to their best level since mid-2017. New home sales, which are also signed contracts, have been unequal in recent months, but have risen by about 15% so far.
Similarly, mortgage application applications are up about 15% from last year's highs in mortgage rates. Notice that the low levels in all these series coincide with the high levels of mortgage interest rates at the end of last year.
Consumer sentiment around the housing market has also reversed. The Fannie Mae Home Purchase Index, which has proven to be a useful contributor to housing activity forecasting, has recently jumped to a high cycle. According to the conference board, intentions to buy new homes have erupted to levels not seen since before the financial crisis.
It would be one thing if consumers did not feel better about buying a home after a sharp drop in mortgage rates, but today it doesn't seem to be the case.
The housing market is recovering normally
The basic history of the housing market is one of normalization. A popular trope in recent years is the shortage of homebuyers. The home is largely backed by investors and cash deals, or so the story goes. This is really yesterday's story.
Look at the resale market. As of June, homebuyers represent 35% of total resale purchases, the highest since at least 2011. All investor money and purchases see their share of total purchases fall. Affected sales are decreasing and conventional sales are increasing.
Likewise, the combination of sales has turned for the better.
At the beginning of the redevelopment, when many properties were in trouble, sales of existing homes soared. Usually, sales of existing homes are about five times that of new home sales. In the years following the recession, existing sales exceeded about 10 times the level of new home sales. As troubled real estate has cleared and new home sales have grown, the composition of home market sales seems much closer to normal.
Of course, there are some reasons to worry about housing. For example, mortgage spreads have widened – that is, mortgage rates have not declined as much as cash yields, indicating that consumers have not noticed a good part of the recent decline in the Treasury market.
Of course, this is not uncommon, and we remain skeptical that banks are aggressively tightening lending standards. Usually, banks take several weeks to pass on lower interest rates to their customers, although this spread is observed.
The stock market does not buy the worries of the housing market
For investors, the economic outlook is only beneficial insofar as it is combined with the financial markets. Many who express a bearish view of housing have been doing so for months. How exactly did this happen? Not good.
Despite concerns for the housing market, inventories of home builders are doing well. In fact, after high mortgage rates last year, the S&P 1500 housing index outperforms the broad stock market by approximately 30 percentage points. Even home improvement retailers, such as Home Depot, which is part of the enchanted sector, did poorly last fall.
Bear economic commentators are welcome to make their case in the housing market. Markets are welcome to ignore them.