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Another Housing Bubble?

April 23, 2021

Is the housing market experiencing another bubble akin to the crisis in 2008? Catch our newest TrendsTalk episode with ITR Senior Forecaster Connor Lokar for insights on the latest housing trends.



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Transcript by Rev

Hello, everyone. Welcome again to this latest and greatest TrendsTalk with ITR Economics. I'm Connor Lokar, Senior Forecaster. And today we're going to answer the question, is housing a bubble? Are we in another bubble for the US housing market? I chose this one today because I've actually gotten that question a couple of times in the last couple of weeks. And I don't think it's inappropriate to ask. I think particularly for folks burnt in what may go down as one of the bigger bubbles in history, looking back at the housing crisis a decade ago, those scars take some time to heal and they never fully go away. So I would guess the folks that asked that got particularly burnt a decade ago.

So in short, our answer and our thoughts here at ITR is that no, it's not. Is the growth rates that we're seeing right now sustainable over the next three years? That answer is also no. So while it's not a bubble, we do think that things will slow down at some point. And I'll kind of unpack that a little bit. But at present, single unit housing starts are doing tremendously. I really think the market, as we looked back at it, it was interrupted for all of 30, maybe 45 days.

As we look at around this time last year, we saw some interruptions as different states were trying to figure out what exactly their shutdown mandates, where we did see some interruption, particularly state and local governments in particular, on the permit issuance side, we did see permits take a bit of a nosedive in March and April of last year, but just like that, they quickly snapped back. We saw things come back very quickly. Single unit housing starts, which we're accelerating before COVID-19 decelerated very briefly and then move right back into an accelerating trend, which is where they are right now. In the 12 months through March, single unit starts are up 13%. in the first quarter alone, up 19.6% from a first quarter that wasn't all that bad, really, even with a less than stellar March number. So very impressive ongoing ascent.

And a natural question to ask yourself when you see this type of growth, I think particularly when you look around at softwood pricing is just at obscene levels. Metals pricing is up. I think you're not unfounded in that level of anxiety and to ask the question of whether or not it's a bubble. So we think it's a nice runway here in the near term in particular. Things are going to continue to accelerate into the latter portions of 2021, but we do not think it is going to last indefinitely. But deceleration and a bursting bubble are two entirely different scenarios there. And we think that it's going to be the former, that decelerating pattern as we move into next year. So I think that's what you should prepare yourself for.

I think something that's still encouraging and what we'll watch for in terms of normalization, not just new home sales, but existing home sales, because this is really a demand-driven search right now. And what we see is the supply side is trying to catch up. That's why the start's environment is so robust right now. It's because inventory levels are just at critically low levels right now, some of the lowest that we've ever seen and developers are trying to bring that supply to bear to the market, to meet that demand.

So as we continue to look at home sales, new home sales are up double digits. Existing home sales are up ,7.6% on an annualized basis up more than 17% on a quarter over quarter basis. So what we're keeping an eye on for this forthcoming deceleration is when is that demand pressure going to slow down? When we look at the NAHB, for example, the National Association of Home Builders, the housing market index for the near term, the next few months is still signaling quite positively. As far as the middle to latter portions of this year, we see some ongoing upside pressure there. So developers are still excited.

So the question is when are buyers, or perhaps a lack of buyers going to make them less excited? And that's when we're typically looking at and watching two things, personally, and things that I think you should keep an eye on. One that has been an interesting comp particularly over the last 10 years has been mortgage rates. It seemed that we've had a very responsive and it's always obviously been relevant for single unit housing, but it's been a particularly good match over the last decade when we look at the 30-year fixed mortgage rate average on a month to month basis and compared it to the growth rate for single unit housing starts. And what we see is that has about an 11 month lead time. So we get a nice heads up for when things are going to slow down.

Now, when we look at conventional 30-year fixed mortgage rates, they are moving higher and they've just started to do so in the last two or three months. For those of you that track 10-year treasury yields against which we tend to see mortgage rates track, we have seen that mortgage rates have crept up and are actually now back above 3%. Now, most of you, particularly baby boomers and even Gen-Xers are sitting there thinking, 3% mortgage rate, I mean, that's a joke. I mean, never take us back to the 70s, early 80s. But for a younger generation, my generation, even probably a little early for Gen-Zs to be really relevant in the home buying space, but certainly starting to, but for millennials, 3%, that's very attractive. And as bizarre as it may sound, it almost seems normal seeing mortgage rates in that three, obviously three more recently, but in that 4% range.

So as we see those mortgage rates creep higher as they are right now, and I think it's a reasonable expectation that they'll continue to do so in the months ahead, we see that on an 11 month lagged basis, the starts trend should start to react negatively to that, not negatively on an absolute basis, but those rates of change should start to come down, some deceleration next year. If we add 11 months to early 2021, that puts us into early 2022, where we're going to expect a response from the development market to the downside against some of these increasing mortgage rate pressures. And I think we can anticipate with ongoing economic recovery, increasing inflation and the possibility of even more stimulus that we should see some mild upward creep in bond yields throughout this year that will continue floating that mortgage rate higher.

But that's very different than... A modest deceleration is very different than a bubble bursting. I think it would take severe mortgage rates movements north of 5%, maybe 6%, something like that to create a truly negative response from the market, or I guess from the buying pool, really, and then that translating to the development market. So I wouldn't be nervous. In fact, I would quite frankly expect some modest upside pressure on mortgage rates, but if they go from the freakishly low territory they were in the last several months back to high threes, low fours, that's more or less normal. And I don't think that there's a severe amount of sticker shock there, but likely enough for things to slow back down.

And I think what I'm watching for is really going to be the inventory levels. When we look at inventory levels out there, which are still declining, it has a little bit shorter lead time in about four months to the single unit starts' 12 rate of change, but it's been a nice comp for us over the last couple of decades. And right now we still see inventory levels dropping. So what I'll watch for is first, those mortgage rates to increase, which they're doing.

And then what I want to see is okay, at which point does that overwhelming starts growth that we're seeing and are expecting to see throughout this year, is that really ever going to overwhelm demand to the point that we need to get nervous? Are we all of a sudden going to see existing home inventories, new home inventories exploding in an upward direction indicating saturation and of course, that potential popping of that dreaded bubble? But I really don't think that that's something that we're going to see, but I would recommend you watch inventories. We're certainly going to be watching that in the quarters ahead, particularly next year in 2023, for any indication of any worrisome market saturation.

But what I'm going to leave you with is this thought. And when we see the headline growth rates, when we see the lumber prices, like I said, it's certainly defensible to be concerned, but the data point that I would pay attention to is 1.03 million. That is the 12 month moving total for single unit housing starts through March 2021, the most recent data available. 1.03 million units constructed in the last 12 months. That is still less than 60% of the north of 1.7 million units constructed on an annual basis almost 15 years ago, going back to early 2006 at the prior single family housing market peak. We are building less than 60% of that bubble territory that we were once in.

So yeah, maybe if we were at 1.5, 1.7, maybe going to two million units annually, I think that that bubble conversation might warrant a little bit more conversation, but I still think at these levels, the demand is there very clearly. My generation, the millennial generation, as we're moving into our more, or just maturing as a demographic band, even the youngest millennials now believe it or not are up until their mid in getting into later 20s. Households are forming. Kids are being born. That pull towards suburbia is there. We got a nice boost here from COVID-19 under some anomalous circumstances, but I do think that millennials are situated in a nice position to continue providing demand for single family housing, even with baby boomers retiring and perhaps selling one of multiple homes everywhere, along the way here in the next several years.

So indefinitely accelerating market, no, but a bubble, we don't think so. Not this time. We'll certainly let you know if we see that changing, but for now I think you should plan on a three-year runway of growth. And for that to slow down a bit in 2022 and 2023, compared to the breakneck pace of 2020 and 2021. Thanks for checking in. I'm Connor Lokar. This was ITR Economics' latest TrendsTalk.


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