There’s no place like home

Most of us have been spending an extraordinary amount of time at home, and if we are lucky – as I am – we have been healthy, employed, and surrounded by loved ones. There really is no place like home, which brings us to the housing market, and what it might mean for the US economy and US consumer as we battle back from the COVID-19 caused recession. First, we argue that for most Americans their house is far and away the most significant asset they own or will ever own (most Americans have nominal  exposure to risk assets, such as stocks). In fact, it is the primacy of the house as a financial asset (and a levered one at that) which made the Great Recession “great.” Fortunately, the housing market of today doesn’t resemble the housing market of the 2000s. In the middle part of that decade we built about 2 million new homes a year, a pace of construction that pushed the supply of homes for sale to 10 months in 2007, a supply spike contributing to, and helping pop, the housing bubble. In contrast, during the back half of the last decade we built about 1.1 million new homes a year, a pace of construction leaving supply well short of demand, and has the current supply of homes for sale at about six months. Beyond the favorable supply/demand dynamic for housing, home prices have more than recovered what they lost through and following the Great Recession, with the S&P 500/Case-Shiller Home Price Index recently hitting an all-time high. Those price gains, along with a reluctance among homeowners to treat their homes like an ATM, has led to an extraordinary increase in homeowner equity over the past 10 years. In fact, according to CoreLogic, homeowners saw an aggregate increase of $6.2 trillion in home equity from Q1 2010 through Q1 2020, or about $106,100 per homeowner, and as of the end of Q1 2020, 1.8 million homes had negative equity, compared to 12.1 million homes ten years ago. Today’s housing market is a pillar of support for consumer sentiment and spending, and if Americans did want to lever their home equity or buy a new house, they could do so at rock bottom interest rates. Consider that the US 30-year fixed rate mortgage sits at a record low 3.13%, compared to 1981 when the 30 year fixed rate mortgage was 18.5%.

Download the weekly wire

Tagged: weekly wire, market perspectives, Tim Holland, housing market, COVID-19