Ernest Rutherford, the father of nuclear physics is attributed to saying, “All science is either physics or stamp collecting.”
To paraphrase Rutherford for economics models, if models don’t include demographics and productivity, they might as well be stamp collecting. As it turns out, we have a lot of philatelists in housing economics – I call them the housing bubble boys.
The U.S. economy started the year off in an expansionary mode. Retail sales were positive year over year, job openings were roughly at 7 million and the housing data for the first time in a long time started to outperform other sectors of the economy. Existing and new home sales hit cycle highs, purchase application data showed steady double-digit year over year growth and housing starts had almost 40% year over year growth in February.
Then we were hit with COVID-19, and the fear of this virus along with the economic decline due to the stay-at-home orders whipped the housing bubble boys into a frenzy of crash calls.
My long-standing core thesis has been that the housing market would have the weakest recovery from a crash in the years 2008 to 2019, but it would improve in years 2020-2024 because U.S. demographics would become favorable for housing.
This is the time frame where we should see 1.5 million total housing starts and the purchase application index will get over 300. When the COVID-crisis hit, I had to either believe in my economic models or raise the white flag and admit that in these circumstances, anything goes.
I chose to stick to my model, which states that for housing, it is demographics and mortgage rates that calls the show. Based on my model, I told everyone to wait until July 15 before drawing any conclusions about the imminent demise or survival and recovery of the housing market.
I wrote this on April 10, 2020:
“My advice is to take the next three months of housing data and put a giant asterisk on all of it. Wait until July 15. By that time, we have a lot of questions answered, and we will be getting the June existing home sales report soon after that.”
Let’s just say the five things I talked about in that article was a heads up to my fellow bearish friends that not only were they wrong with crash calls for the last seven years, but a lot of things would need to happen to have a housing crash in 2020.
I highlighted July 15 because if my AB economic model worked, then we would have gotten better news of the virus by May 18. This would mean that in the 30-60 days after that housing would be fine because without lockdown protocols in place, demographics and low mortgage rates would fuel homebuying.
Over the next few weeks, we get June’s data. This is where we should start the housing conversation all over again. Now, we are entering Act 4 in 2020 for housing, and it’s time to let go of this crash thesis. The reality is this: it wasn’t going to happen in 2020 even with a pandemic virus. If you want some ideas of what it would take to trigger a housing downturn in 2020, here are some from me.
What recent housing data looked like:
The Mortgage Banking Association purchase application data for the last seven weeks on a year-over-year basis look like this:
+18%, +13%, +21%, +18%, +15%, +33%, +16%
The most recent pending home sales were up 44% month to month.
Purchase application of new homes up 54% year over year, according to MBA.
At some point in the future, home prices will fall and sales will decline year over year, but even when this happens it will not constitute a bubble crash anytime soon.
Today, we are on an upswing. The U.S. housing market is undergoing a V-shaped recovery, but until existing home sales hit 5,770,000 again, the full recovery in existing home sales will not be complete as that was the number we hit earlier this year
My predictions of an economic recovery (what I called by AB economic model) was on target until this latest surge in new COVID-19 cases.
Alas, I didn’t account for the emergence of a political movement built around not protecting oneself and one’s family from illness.
My recommendation, even with the new increase in COVID-19 cases, is to start a conversation regarding the future of the housing market all over again to refocus on the factors that really matter: demographics, mortgage rates and the national progress to conquer this horrific virus, reopen the economy and get people working again.
As long as purchase application data stays flat to positive on a year-over-year basis, housing will be fine in 2020.
We have a lot of work left to do in this country. In the meantime, let go of the bubble crash thesis, because the reality is it wasn’t going to happen in 2020, even with a pandemic.