Is housing the next domino to fall?

While silly optimism is allowing for the stock market to bounce back for the time being, another type of asset may be heading down soon. Because if you look a little closer, there are a lot of headwinds threatening the housing market. That's true now, as unemployment skyrockets, and for the coming years due to demographics.

Several factors that characterized the last decade will now work against housing. The lowest interest rates in U.S. history spurred a boom in luxury housing. At the start of the last decade, about a fifth of the homes in the U.S. were priced at $300,000 or higher. Ten years on, that's true for more than half of all homes. The National Association of Realtors says the inventory of existing homes for sale has dropped to about three months of supply from more than seven months. Supply has shrunk as millions of Baby Boomers unexpectedly delayed downsizing. One of the reasons for this was the longest bull market in stocks in history, which afforded would-be sellers the wherewithal to continue carrying higher maintenance and larger homes than otherwise possible.

The recent reversal in the stock market has the potential to expedite the long anticipated “Silver Tsunami.” A June 2019 Fannie Mae report tallied the number of homes owned by boomers and the generation that preceded at about 46 million, more than a third of the 140-million-home housing stock. Zillow Group Inc. predicts “upwards of 20 million homes hitting the market through the mid-2030s (which) will provide a substantial and sustained boost to supply, comparable to the fluctuations that new home construction experienced in the 2000s boom-bust cycle.”

But now, the number of homes Zillow projected to hit the market in a disciplined fashion over the next 15 years will become an exodus as retirees’ need to monetize the equity in their homes to supplement their disposable income skyrockets. One can only imagine how swiftly home prices will decline once boomers feel safe enough to open their homes to outsiders as part of the normal sales process. The University of Michigan’s preliminary consumer sentiment index for April that was released Thursday [April 9] showed that plans to buy a home tumbled the most since 1979.

And a provision of the GOP Tax Scam has made owning a home less valuable for many Americans, largely due to the limiting of the State and Local Tax (SALT) deduction to $10,000 for either single or married filers combined with the larger standard deduction for married couples, which makes it less worthwhile to write off mortgage interest and property taxes.

The capping of deductions at $10,000 has already led to a 10% to 25% discount on home prices in high tax states relative to their lower-tax counterparts. Anticipated increases in property taxes to offset collapsing state and municipal budgets will amplify the damage inflict on those on fixed incomes.

Because of the combination of tax constraints, a sudden loss of income for many and uncertainty for others, you can see where the housing market that has had quite a runup in recent years is likely to at the very least take a breather, if not outright come crashing down.

In addition to a likely drawback in housing values, home building also seems to be a Bubble that is popping along with the economy.

Building Permits
Privately‐owned housing units authorized by building permits in March were at a seasonally adjusted annual rate of 1,353,000. This is 6.8 percent (±1.1 percent) below the revised February rate of 1,452,000, but is 5.0 percent (±2.4 percent) above the March 2019 rate of 1,288,000. Single‐family authorizations in March were at a rate of 884,000; this is 12.0 percent (±1.9 percent) below the revised February figure of 1,005,000. Authorizations of units in buildings with five units or more were at a rate of 423,000 in March.

Housing Starts
Privately‐owned housing starts in March were at a seasonally adjusted annual rate of 1,216,000. This is 22.3 percent (±12.2 percent) below the revised February estimate of 1,564,000, but is 1.4 percent (±12.7 percent)* above the March 2019 rate of 1,199,000. Single‐family housing starts in March were at a rate of 856,000; this is 17.5 percent (±13.1 percent) below the revised February figure of 1,037,000. The March rate for units in buildings with five units or more was 347,000.

Housing Completions
Privately‐owned housing completions in March were at a seasonally adjusted annual rate of 1,227,000. This is 6.1 percent (±12.0 percent)* below the revised February estimate of 1,307,000 and is 9.0 percent (±12.4 percent)* below the March 2019 rate of 1,348,000. Single‐family housing completions in March were at a rate of 863,000; this is 15.0 percent (±11.6 percent) below the revised February rate of 1,015,000. The March rate for units in buildings with five units or more was 357,000.

It’s worth noting that much of these losses were a retracing of Bubbly increases between September and January.

And given that layoffs were much higher in April than March, it seems likely that housing starts will continue to drop, leading to more layoffs in the construction sector. Which sure isn't going to make people want to own a house in the near future, and will add to what is already a bad outlook in the sector.