Beginning in 2007, the United States’ housing market began to flash warning signs of an impending collapse, but homeowners, investors and builders refused to heed the warnings. Within a year, the housing market and Wall Street were in a free fall, and millions of people would lose everything in the Great Recession — the worst economic turndown since the Great Depression.
The housing market is starting to flash warning signs again. Just like last time, experts are providing reasons and excuses that ignore the fundamental problem — there is a shortage of buyers. There would be more buyers, but builders cannot build houses affordably because of land prices, government regulations, and building material costs, which have escalated because of tariffs and increased construction labor shortages and costs. Throw in rising interest rates and political uncertainty, you have the makings for a significant turndown in housing.
Just like in prior turndowns, housing generally leads the economy in and out of a recession, because home construction is the one American industry that cannot be outsourced.
These following housing signs flashed brightly in June:
- The National Association of Realtors reported that existing home sales, which account for about 90 percent of all homes sold in America, were down 2.2 percent from the prior year. It is taking longer to sell a home. Plus, buyers are hard to find.
- The federal government reported new home sales were down 5.3 percent from May and only up 2.4 percent from the prior year. Housing inventory rose to 5.7 months, which is up from 5.3 months in 2017. The median price for a new home dropped in 2018 to $302,100 versus $315,200 12 months earlier. Lagging sales, declining prices and increased housing inventory indicate that the new home market is cooling.
- According to the U.S. Census Bureau, housing permits were down 3 percent from 2017, and housing starts were 4.2 percent below the prior year. This indicates current activity has slowed down. Even worse, future activity is slowing.
There are some who will read these numbers and quickly point to all the housing activity in Lake and Sumter counties as rebuke to these numbers. Yes, the local area is doing better than the national housing numbers indicate. However, you must consider that Hurricane Irma pushed out local housing demand by at least four months and the permitting process in Florida pushed demand further out than other states.
For me, the canary in the coal mine for housing has always been the wood commodity markets. These markets react quickly to changes in the housing market and it doesn’t take months to get a read on them. The wood commodity markets in July and the first of August could be best described in a price freefall, despite tariffs. Mills and manufacturers have drastically cut the price of wood and plywood to keep mills operating. Without a hurricane or spike in demand, these markets could go lower by year end.
Florida’s housing market should be better than other areas of the country, but despite Florida’s housing advantages, realtors are reporting that qualified buyers and affordable homes are harder to find. As with the last recession, it will eventually catch up with Florida.
Homeowners, builders and investors: Don’t ignore the signs this time — if housing is, indeed, slowing down. Although many will try to convince you that the markets are down for other reasons, in all cases, it goes back to actual sales. If people aren’t buying wood commodities they are not building homes. That alone could be your best guide.
Don Magruder is the CEO of Ro-Mac Lumber & Supply Inc. He is also the host of the Around the House radio show heard every Monday at noon on My790AM WLBE in Leesburg.