Last month, Zillow made headlines when it released a report predicting the next recession would begin “sometime in 2020.” Of Zillow’s 99 experts, nearly half (48%) agreed on this timing. The group cited “monetary and trade policy” as the likely instigator of the economic downturn.
These economists have some solid points. However, I would argue the future is not nearly as straightforward for our national economy or the national housing market as it might at first seem. I believe a solid argument may be made that the national housing market’s upward trend could have years ahead of it and, barring certain highly specific events, the national economy could continue to expand right along with it.
When we look at The Economist's U.S. House Price Indices, we see the U.S. housing market take a sharp dive during Q1 2007. Prior to that dive, the market had spent more than a decade trending upward nationally. When viewed from a quarterly perspective instead of a month-to-month perspective, the last national downward dip was in 1994. In Q1 2012, the national housing market hit bottom. As of Q4 2017, the housing market had been trending upward for nearly six years. We’ve started hearing terms like “housing affordability crisis,” “overvalued” and “downturn.”
(Note: This discussion revolves around the national housing market. While the data and concepts may be applied on regional and local levels, market specifics will alter the general outlook in terms of timeline.)
Based on “conventional wisdom” that the housing market and the broader economy cycle roughly every decade, we are, at six years into an uptrend, due for a shift in the housing market, if not in the broader economy. It should be easy to agree that at this historical moment housing and the broader economy are more closely linked than ever. Attribute this however you like: Both sides of the political aisle alternate taking credit for creating and encouraging the “American Dream” of homeownership and vilifying the other side for irresponsibly legislating unprepared homebuyers into ownership depending on the economic and political climate in the country.
However, no matter who we credit (or blame), in the late 1980s and early 1990s a consumer sentiment shift took place when homeowners and homebuyers began viewing their primary residences as investments rather than homes. In 1988, Marc A. Weiss, an urban planner with the Lincoln Institute of Land Policy, told the New York Times that home purchases had become shrouded in anxiety over investment value, whereas security and stability were previously the top considerations.
I would argue that this shift in consumer sentiment, coupled with the devastating effects of the housing crash in the mid-2000s, subsequent global financial meltdown, and long-extended “recovery” period that still has not quite hit the official mark on a national level for a full recovery (peak index value in Q4 2006 reads 136 vs. Q4 2017 reading 117), is setting the country up for an over-extended housing uptrend that might last until the projected 2020 economic downturn. And thanks to the close ties between housing and our national economy, this uptrend could possibly forestall that downturn if national monetary and trade policy cooperate. I do agree with Zillow’s panel on that count.
Fortunately, today’s market lacks many of the harbingers of correction.
The idea of a longer real estate cycle is not a new one, although it is not prevalent. Financial writer Philip Anderson wrote during Q1 2012 near the national housing nadir, that to his eyes U.S. real estate cycles may be viewed through the lens of land sales and construction activity as 18-year cycles instead of the conventional decade measure. With brutal hindsight, he observed that land speculation and unsound credit practices have historically preceded downturns.
Anderson cited multiple instances since 1800 in which the economy and real estate flourished and fell in a predictable pattern on longer cycles than the traditional decade. For our purposes, the most significant crash is certainly that which preceded and lasted throughout the Great Depression. Elementary U.S. history courses blame Black Tuesday for the entirety of the Great Depression. However, such a view is overly simplistic and leaves out reckless lending by banks, economic instability from falling agricultural prices and overexpansion in the wake of record corporate profits earned earlier in the decade. It also neglects the roles that monetary policy and terrible weather patterns played in exacerbating the problem.
Looking at the Case-Schiller Historical Housing Index (registration required) shows an arguably a long run upward in home values between 1942, when World War II began, and the housing boom in the 1970s. Although there were some blips along the way, they were fairly short-lived and tended to level out over time, returning to what were essentially, 1950s norms before edging upward and assuming what we have now come to consider the typical housing boom-bust cycle through the 1970s, 1980s, 1990s and 2000s.
To accurately assess the state of the U.S. housing market today, we must look beyond the past 40 or 50 years. We must look back to the last catastrophic economic event that shook the country and ask:
• Are we engaged in reckless lending?
• Are we in the midst of economic instability?
• Are we setting up the circumstances for housing market overexpansion?
If the answers to these three questions are no, then I would propose that the national housing market (and a number of hot regional ones as well) may have longer legs than we’re currently expecting.
