Here's why you shouldn't worry about the housing market

You may have heard about a new housing crisis in the US.

The idea is that supply of houses cannot keep up with demand, which is going to inflate prices and keep young people priced out of owning a first home.

Additionally, this inflation gets passed on to the rest of the economy and reflects worries about the US’ economic future.

There are certainly problems with the US housing market, but according to Joe LaVorgna, chief US economist at Deutsche Bank, there’s no reason to get too worried just yet.

“To be sure, the housing market was expected to be weak in the aftermath of the recession, as households repaired their severely-impaired balance sheets,” wrote LaVorgna in a note to clients.

“However, household deleveraging is now complete, mortgage rates are low and banks have been loosening lending standards for residential mortgages. Therefore, an optimistic perspective is that the recent data are an aberration and housing will contribute meaningfully to growth in the remainder of this cycle”

Here’s the crux of LaVorgna’s argument. People need the access to and appetite for credit to buy a house. The most recent cycle post-recession has seen little of either.

In terms of access, as banks and lending institutions have recapitalized, there has been higher standards for mortgages thus shutting many first time buyers with lower credit scores out of the market.

And for appetite, many households in the US have spent the cycle, up until this point, paying down existing debt instead of taking on new credit. Additionally, there is evidence that an underlying psychological effect has kept Americans away from borrowing.

To LaVorgna, the recent increase in wage growth, strong labour market, and improving access to loans should overcome these headwinds soon.

“After all, housing-related spending has exceeded its historical average in every economic expansion since 1960, peaking considerably in excess of 18% in most cases,” said LaVorgna. “Moreover, the peak has generally occurred late in the cycle, suggesting that an acceleration in housing activity could be imminent.”

Currently the share sits at 17.4%.

So both history and current trends could help the housing market break out of its current funk. LaVorgna does caution, however, that the growth won’t be exceptionally robust.

“Increased demand appears to have manifested disproportionately in elevated prices rather than greater real output,” said LaVorgna.

“The situation is exacerbated by the fact that income growth is now slowing. Therefore, although we do expect the housing sector to outperform the rest of the economy in the next few quarters, we are only cautiously optimistic on housing.”

And this is the problem with LaVorgna’s argument. It’s not that people don’t want homes, the demand is strong, it’s that people that want these homes can’t get them.

Some large homebuilders, seem to believe that supply will soon catch up to demand since labour issues are alleviating and more people are moving to areas where it is cheaper to develop, and thus the strength of the market will accelerate.

So far, considering that housing starts and building permits missed expectations substantially on Tuesday, this hasn’t materialised.

Though there is something to LaVorgna’s basic idea that while it may not totally alleviate the problem, if demand continues to be robust it would make sense for homebuilders to increase supply to catch up.

Basically, sure, there’s a problem, but don’t worry yourself sick over this new housing “crisis.”

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