After pending home sales collapsed in December, will builders make the vital investment in new housing to avoid a U.S. housing market crash?
In the latest piece of rough U.S. housing market data, pending home sales crashed last month.
The 4.9% decline was the largest in a decade, and drastically lower than forecasts for a 0.5% gain. Given that the decline occurred before the coronavirus outbreak in China, the true economic impact is still unknown. The external shock expected from the epidemic comes at an awkward time for U.S. house prices.
Pending home sales do not represent a completed transaction, but they do outline an agreement where contracts have been signed. For this reason, it can be an excellent front-running indicator to future housing trends. If this indicator is through the floor, it suggests that there could be further weakness down the road.
The most curious thing about this deep dive is that it comes at a time when U.S. consumer confidence is very high. In addition to this, the stock market has performed very well over the last few months.
If housing demand is weak given this climate, then it doesn’t paint a great picture of how it might react once the true extent of the coronavirus outbreak is realized in China.
ING economist Iris Pang outlined this economic uncertainty in a recent report on the Wuhan epidemic, noting,
SARS is believed to have knocked 1.0%+ off Chinese GDP back in 2003, but the huge uncertainty around the spread of the coronavirus makes the macro impact very difficult to forecast.
While previous economic impacts from epidemics in China are useful indicators, they provide limited insight of the current threat because of China’s considerably larger share of global economic output today. There’s no accurate forecast as to when Beijing gets the outbreak under control.
Attempting to explain the dramatic drop in pending sales, NAR chief economist Lawrence Yun has placed the blame on low inventory, which is creating a buying vacuum. In Yun’s view, this threatens the stability of the U.S. housing market unless more affordable homes are built this year:
The state of housing in 2020 will depend on whether home builders bring more affordable homes to the market. Home prices and even rents are increasing too rapidly, and more inventory would help correct the problem and slow price gains.
Will home builders feel comfortable making this type of investment? It’s unlikely given the current state of the economy coupled with the China epidemic.
Despite the darkening outlook moving forward, it’s not all bad news. The most recent NAHB housing index was close to multi-decade highs, suggesting builders remain confident. Additionally, December is traditionally a lousy month for home sales.
Despite this, the scale of the pending home sales drop is unquestionably eye-opening. Should evidence emerge next month that confidence is cracking, home builders may not make the long-term investment needed to stave off a housing market crash down the road.
Ultimately, the latest report makes U.S. housing data must-watch viewing over the coming months, particularly as the global fallout from coronavirus becomes more quantifiable.
Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.
This article was edited by Sam Bourgi.