With the Dow Jones, Nasdaq and S&P 500 near all-time highs, it is not a common belief that the economy is struggling. For well over a year we have written about the fact that low interest rates and corporate stock buybacks have been the fuel to this bull market, and the lack of liquidity and volume in the markets are very concerning to us. Furthermore, we have noted that the decline in the unemployment rate has not properly been reflecting the employment situation in the US, but rather has been declining due to a below average labor force participation rate. However, amidst all of the negatives, the real estate sector has proven to be a bright spot in the economy over the past year.
Talk to anyone in the real estate industry right now and they will tell you that there are 2 problems within the sector; first is the lack of inventory on the market, and the second is finding adequate appraisals. When we refer to a lack of inventory, we don’t mean that there are no homes for sale, just very few homes with the amenities and updates that buyers are looking for. When we refer to an adequate appraisal, we mean that buyers and sellers have agreed to a price greater than what the home would appraise for to obtain financing.
According to Bloomberg, MBA mortgage apps are up 7% year over year, and the Housing Market Index is up from 52 to 56, due in large part to confidence among home builders. While new home sales are lagging slightly behind existing sales, this is to be expected; in most cases a buyer of a newly constructed home has to find a buyer for their old home prior to committing to a new purchase.
New home construction and home sales, while they cannot drive an entire domestic economy, can provide a significant cushion for GDP growth and jobs. Consider all of the factors of home construction and sales. Real estate agents, builders, raw materials suppliers, manufacturers of appliances and finishings, and more all benefit from upward movement in the housing sector.
We believe that the housing sector will continue to show strength in the near term. In fact, housing may see a boost when interest rates begin to rise. When we have seen 30 year mortgage rates near 4% for as long as we have, buyers become complacent and believe that those rates will be around for a while. If buyers believe that rates may be rising, we likely will see a bump in sales as they look to lock in those low rates.
While real estate has shown strength, the overall economy still has yet to show significant recovery. Our hope is that we can get more people back to work and financially healthy once again, and that the housing market, both locally and nationally, will reap the benefits and continue to show signs of growth and strength.