In late 2018, the American housing market saw a steep decline in purchases. As of December, homebuying was down 10.3% from the previous year. Home sales had been declining in every month, except for February. Economists say that this decline in the housing sector raises the possibility of a weakening economy, and not without reason: according to a note by UBS, significant housing declines have foreshadowed nine of the 11 post-World War II recessions in the united states.
Aside from the intensifying drops in home sales in the latter quarter of 2018, the US economy had been strong, as evidenced through wage growth and low unemployment, among other positive drivers. One explanation for the decline of the housing market is that mortgage rates have increased, thus convincing prospective homebuyers that the market had become unfavorably expensive. Furthermore, home prices have been growing over the years, averaging at $253,600 in December.
Millennials are growing into the housing market, but the cash-strapped and debt-ridden generation is buying homes later than their Boomer parents. Their participation in the market can help, yet they are faced with the challenge of affordability. Many millennials decide to rent instead when they see the higher monthly payments of increasingly expensive homes. While rising interest rates and deferred home buying contribute to the slowdown of the market, neither reason explains the steep drop in fourth-quarter home sales. Other factors include rising construction costs, a reduction in the mortgage deduction in the new tax law, and less flexibility in underwriting.
Fortunately, a housing collapse is not imminent. Consumer spending is strong in areas other than housing, and as mentioned previously, unemployment is low while wages are growing. Unfortunately, however, there is no quick fix for the housing market. Either costs and rates need to decrease, or wages need to increase, and it is unlikely that either will happen in the near future.