America’s housing market has come back to life in the final months of the year, and promises to boost the economy in 2020.
Low mortgage rates, a strong labor market with rising wages and unemployment hitting at a 50-year low are underpinning the solid fundamentals that will help real estate next year.
“The housing market is probably going to be a modest tailwind to the economy,” David Berson, chief economist at Nationwide, told CNN Business.
Housing doesn’t contribute as much to GDP growth as other sectors, but it is an important industry for the economy as a whole. The appetite for buying a home – arguably the single largest purchasing decision one makes in life – is a bellwether for how the consumer is doing. Consumer spending, in turn, makes up some two-thirds of US economic growth.
Mortgage prices fell to three-year lows in the third quarter, and even though they have rebounded slightly, home loans remain more affordable than they used to be.
Consumers also had some time to get used to the impact of the 2017 tax reform, which changed the deductibility
“There were changes to the economics of home ownership,” said Michael Gregory, deputy chief economist at BMO. “Particularly if you were in a place with high state and local taxes, or you had a rather large home with a big mortgage, the after-tax cost of owning a home increased.”
But the favorable fundamentals for people looking to own a home outweigh the new tax reality: “In some cases incomes are even growing past than home prices,” Gregory said.
Building boom ahead
As consumers increasingly look to buy, the low inventory of available single family homes in America is spurring building activity.
Meanwhile, the Federal Reserve, whose benchmark interest rates impact lending prices for home builders and mortgage costs for consumers, has indicated that it will keep its rates on hold for now. The central bank cut interest rate three times this year.
The good news culminated in the Housing Market Index this week, which surged to a 20-year high in December.The survey is published by the National Association of Home Builders and Wells Fargo (WFC).
Looking at the index’s 34-year history, there are only a few months that exceeded this December reading. The index didn’t even go this high in the lead-up of the 2008 mortgage crisis.
The HMI is indication of confidence, not a measure of building activity. Still, it suggests that better times are ahead of the housing market. Housing starts and building permits for November also exceeded expectations this week.
Challenges in 2020
But there are still some clouds on the horizon.
Home builders struggled with a shortage of construction workers in the tight US labor market this year, while import tariffs on steel and lumber made materials more expensive.
The United States is working to resolve its trade spats, which could ease the tariff burden next year, but dynamics in the labor market are not expected to change so fast.
“We have very low unemployment, and home builders have a hard time finding skilled construction workers,” said Lawrence Yun, chief economist at the National Association of Realtors.
This means builders will have to get creative. Constructing homes from factory-made modules, for example, would use fewer construction workers, Yun suggested.
Regulatory changes in the aftermath of the financial crisis also make it harder for banks to lend to home builders to speculatively build homes, Berson said. While this prevents overbuilding, it also holds back construction in a market that already has a low inventory of homes.
Buying conditions for consumers are good on the whole, but there aren’t enough affordable homes for all the buyers who want them. Economists believe this will even out over time.
“Builders will build for where the demand is,” and if most demand is in the mid to low-priced tiers of the market, then that’s where activity will pick up, Berson said.