Why Should You Care About the National Housing Market?
July 22, 2019
By Colin O'Shea
Buying a home is one of the most important decisions you’ll ever make, so it's no surprise that homebuyers pay close attention to the U.S. housing market.
But did you know the housing market is also an important economic indicator for investors? Here are a couple of reasons:
First, owning a home is the main source of wealth for Americans. Secondly, the U.S. real estate market makes up about 20 percent of the national GDP during a healthy market. The home buying process of residential investment (construction, remodeling, commissions and broker fees) provides approximately 6-7 percent; while consumption spending on housing services makes up the other 12-13 percent of the real estate market’s contribution to GDP.
This means that a strong housing market — and the consumption that comes with it — positively impacts other sectors of the economy including energy, consumer staples/discretionary, materials, utilities and more. An improving housing market can boost American sentiment, spending and wealth, which in turn can assist current economic expansion. This is evident in the pickup of home sales seen in the second quarter of 2019.
Real Estate Market Trends Higher for First Time in 2019
Existing home sales are now above last year’s levels for the first time this year:
There are a few key drivers spurring the housing market: interest rates, inventory levels and technology.
Even though the Federal Reserve has yet to lower short-term interest rates, yields have decreased. The yield on the 30-year US Treasury note has fallen 85 basis points since late last year. The housing market is a direct beneficiary of the drop in interest rates, because lower rates make purchasing a home more affordable.
U.S. Treasury Bond Yield Curve Comparison (2018-19)
Source: Bloomberg Financial, LP
Can the Hot U.S. Housing Trend Continue?
Yes, the housing market could continue to stay strong, even in the face of slowing economic growth in the U.S. and abroad. This is because interest rates and inventories remain supportive of continued growth in the housing market.
As we've discussed before, the bond market expects the Federal Reserve to cut short-term interest rates at least a couple of times this year. This will likely keep interest rates on mortgage loans lower.
Also, the number of houses for sale has struggled to keep up with demand in recent years. Inventories could remain tight because there are a greater number of new households forming in the U.S. than there are new houses built each year. There are so many new households forming that number of vacancies in general are low:
Technology has also played a role in making home buying easier. One can now complete the entire mortgage process online. Security National Bank’s own Mortgage Hub is a perfect example of how purchasing or refinancing a home can be a simple and user-friendly experience.
To speak with an investment professional about how the national housing market can affect your portfolio, contact our Wealth Management team today.