The housing cycle is likely past its peak, but market outlook remains positive

Data from the latest Health of Housing Markets Report (HoHM Report) from Nationwide Economics says that, while housing fundamentals are still in good shape, existing home sales are likely in year two of a downward trend. The peak in housing activity for this cycle was in early 2017, as measured by single-family existing home sales relative to total households, and this peak was the weakest in absolute terms since the 1970s.

“While we may be past the peak, all signs are pointing to continued elevated sales despite the inventory of available homes remaining tight,” said David Berson, Nationwide senior vice president and chief economist. “Slower house price gains and falling mortgage rates have significantly improved housing affordability while consumer incomes have accelerated — putting a home purchase within reach for more homebuyers.”

The rebound following the housing bust during the Great Recession has been far more subdued than usual. Moreover, the increase from the bottom of the expansion was far below normal. Existing home sales as a share of households finally climbed above the long-term median after about five years of economic growth, but it has not come close to the heights seen during several prior economic expansions.

One of the reasons for the more muted housing recovery in this expansion is tighter lending standards in reaction to the excesses from the 2000s housing boom. These effects were more pronounced earlier in the expansion as mortgage requirements have eased somewhat in recent years. Still, mortgage credit availability remains more restrictive now than what it was estimated to have been prior to 2000.

The historically low levels of existing homes for sale have been another significant factor restraining sales activity in the current expansion. The number of single-family existing homes listed for sale has been below two million units since 2015 and has sat near the lowest readings over the past 40 years. While demand from homebuyers has picked up, the new supply of homes coming into the market has been well short of that needed to create balance.

Even with mortgage rates down sharply and job/income trends supportive of home purchases, sales in coming years are not expected to surpass the peak from 2017. Total home sales are expected to edge down slowly through 2021.

Despite being past the peak, market conditions are still strong

The report’s proprietary Leading Index of Healthy Housing Markets continues to suggest a sustainable housing market. Improved household growth, solid job gains and low delinquency rates are the major drivers of the positive outlook for housing activity over the next year.

National house price growth has slowed further and is near the long-term trend, a positive for sustainability. Lower mortgage rates should boost sales activity and may lead to faster price gains ahead, although the tight supply of homes on the market will likely limit the sales upside.

At the regional level, more MSAs dropped to a neutral rating this quarter compared to last quarter, indicating that housing activity may have peaked – but not suggesting a downturn for housing. This includes more than half of the 40 largest metro areas in the country.

The 10 metro areas with the most positive LIHHM forecasts are, in order: Beaumont-Port Arthur, Texas; Trenton, N.J.; Vineland-Bridgeton, N.J.; Montgomery County, Pa.; Pittsfield, Mass.; Sumter, S.C.; Sebastian-Vero Beach, Fla.; Hinesville, Ga.; Waterloo-Cedar Falls, Iowa; and, Atlantic City- Hammonton, N.J.

The 10 MSAs with the least positive LIHHM outlooks are: Kennewick-Richland, Wash.; Yakima, Wash.; San Jose, Calif.; Mankato-North Mankato, Minn.; Bowling Green, Ky.; Odessa, Texas; San Rafael, Calif.; Pueblo, Colo.; Cheyenne, Wy.; and, Kahului-Wailuku, Hawaii.

More information about the HoHM Report, including the methodology used, can be found at blog.nationwide.com/housing. The HoHM Report is released on a quarterly basis online and in print.