In a statement last year, NAR chief economist Lawrence Yun discussed the housing market’s recovery since the Great Recession (Realtors Chief Economist Reflects on Past Recession, What’s Ahead for Housing; nar.realtor; August 28, 2018). Citing increasing homeownership rates and addressing the recent home sale slowdown, Dr. Yun believes that concerns about a significant housing slump are unsubstantiated. Instead, we may be going through housing market mini-cycles.
Dr. Yun is not the only one pointing to affordability (home prices and mortgage rates) and lack of home sale inventory as causes of market disruptions. But his statement is almost trite: “…even as mortgage rates begin to increase and home sales decline in some markets, the most significant challenges facing the housing market stem from insufficient inventory and accompanying unsustainable home price increases…”
Housing market mini-cycles and the economy
The housing market, like the overall economy, goes through cycles of boom and bust. It’s been about eleven years since the last recession, and many are saying we’re overdue for another one. But if the economic cycles, as described in 1876 by economist Henry George and modernized by Glenn R. Mueller, accurately include recovery, expansion, hypersupply, and recession, there is no clear phase to describe recent housing activity. Instead, what we are experiencing is housing market mini-cycles.
Most understand the concept of the broad economic boom and bust cycle. But most are unaware of the mini-cycle that manifests as repeat periods of short-term growth and slowdown. Recessions typically have broad effects on the economy, where as mini-cycles are are fast cycling and specific to economic sector. So, a complete housing market mini-cycle can last several months or longer and may not spill over to other sectors.
Since 2013, the housing market has undergone at least three mini-cycles of growth. These cycles peaked with record sales volumes, only to be set back by months of sluggish home sales. The causes of the housing market mini-cycles are debatable and, like a recession, clear in hindsight. Of course, Dr. Yun and other industry experts are likely to be correct saying that home prices (affordability) and inventory are to blame. However, there may be other reasons worth exploring as well.
Micro-economic factors are playing a large role in the housing market mini-cycle. Take for example the increase in employee telecommuting. There is an abundant research pointing to how telecommuting has affected the commercial real estate market. These studies point to increased office space vacancies due telecommuting. Companies are downsizing offices because of the reduced need for space as employees are working from home. This trend is recognizable in real estate brokerages. Real estate office spaces are shrinking as the industry becomes increasingly “virtual.”
Telecommuting is also impacting home sales. According to Global Workplace Analytics (globalworkplaceanalytics.com) “Regular work-at-home, among the non-self-employed population, has grown by 140% since 2005, nearly 10x faster than the rest of the workforce or the self-employed.” Currently, there are about 4.3 million employees that work from home at least half the time. As businesses are increasingly hiring a telecommuting workforce, workers opt to stay in their current residence rather than relocate near their new employer.
Does housing market mini-cycles lead to recession? Maybe the the mini-cycle is a brief market correction that helps avoid the broader effects of recession. Take for instance the three housing market mini-cycles that recently boomed in 2013, 2016, and 2017-2018. During these mini-cycles, home prices soared and home sales broke recent records (since Great Recession).
Current economic indicators (at the time of this writing in March 2019) point to a positive home sale season. The Bureau of Labor Statistics (BLS.gov) most recent unemployment statement was 4.0 percent (which included government shutdown stats). The Consumer Price Index remains stable (the CPI-U was last reported unchanged). Real average hourly earnings was reported to increase 0.2 percent from December to January. And after a three-month decline, the Conference Board (conference-board.org) reported a rebound in the Consumer Confidence Index. Given the winter housing slump, real estate may be on everyone’s mind again in this spring.
Original published at https://dankrell.com/blog/2019/03/09/housing-market-mini-cycles
By Dan Krell. Copyright © 2019.
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