White-Hot US Housing Market: The Real Story

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White-Hot US Housing Market: The Real Story

Disaggregating the summary information that makes for headline numbers is one of the recurring themes in our “Data” section. We find, time and again, that this yields worthwhile insights not often discussed in the financial press or other macro commentators’ analyses.

Today we will use this approach to assess both US home ownership and home price data. Changes in both strongly inform trends in marginal consumer spending. And given the burst of home buying we’ve seen during the Pandemic Recession these are especially relevant topics just now.

Let’s start with the headline trends for each indicator.

First, here is the long-term trend for US home ownership back to 1980. As you can see, they have varied considerably across time (a range of 63 – 69 percent, peak in Q2 2004 as shown) and do not directly correlate to drivers like mortgage rates (down across the entire time horizon). Worth noting: the spike you see in Q2 2020 and drop in Q3 are likely due to limited Census Bureau in-person sampling this year. Current reading is 67.2 percent.

Now, here is the Case-Shiller 20-City Composite Home Price index expressed in year-over-year percentage change terms back to 2001 (earliest data available). No coincidence that August 2004’s peak of 17 percent annual price increases came exactly at the peak in US home ownership we just showed you. And the small uptick in home price appreciation in 2020 does seem to fit well with increasing home ownership rates, even if that data is a little wonky just now. Current reading is 6.6 percent.

All this yields a basically optimistic economic picture: more home buying and higher home prices are traditionally two important drivers of economic recovery. When consumers purchase a new home they tend to upgrade furnishing and appliances, leading to higher household spending levels. When existing homeowners see the value of their property increase, it creates a wealth effect that also spurs consumption.

At the same time, it is a mistake to think this phenomenon is evenly distributed across the country. Consider the following 2 points:

#1: Home ownership varies widely across the US and is least common in its largest cities. Here are the 10 US metro areas with the lowest percentage of home ownership:

  • Los Angeles, CA: 48.5 percent of residents own their home
  • New York City, NY: 50.9 percent
  • San Francisco, CA: 53.0 percent
  • Las Vegas, NV: 53.3 percent
  • Urban Honolulu, HI: 53.9 percent
  • San Jose, CA: 54.6 percent
  • Memphis, TN: 58.7 percent
  • Seattle, WA: 59.0 percent
  • Toledo, OH: 59.2 percent
  • Fresno, CA: 59.9 percent
  • Current national level: 67.2 percent
  • Median of top 75 cities: 67.6 percent

Takeaway (1): some 50 million Americans (15 percent of the US population) live in/around cities with home ownership rates that are substantially lower than the national average. Moreover, these include several of the country’s most economically important urban areas (NYC, LA, San Francisco).

Takeaway (2): higher home prices have different marginal economic effects in areas where home ownership is lower than national averages. There is less of a wealth effect, obviously. In fact, higher prices may well push rents higher with no offsetting positive for consumers.

#2: The recent trend of higher US home values correlates strongly with higher pre-existing home ownership rates. Back in Q1 2019 (pre-pandemic) the 5 metro areas tracked by Case Shiller with the higher home ownership rates were Charlotte NC (70.8 pct), Tampa FL (69.3 pct), Minneapolis MN (69.1 pct), Detroit MI (68.1 pct) and Chicago IL (65.1 pct).

This is a chart of the last 5 years of annual changes in home prices for those 5 cities (various colors) versus the Case-Shiller 20-City Composite Index (thick black line). As you can see, all but Chicago (in blue, the line at the bottom) not only have generally outpaced the national average over the longer term but also done better in 2020.

Takeaway: cities where home ownership is structurally higher tend to see better price trends than average. Regional affordability is important in understanding the composition of marginal national home price trends.

Bottom line: the US economy is really a collection of microclimates rather than a unified mass, and the data we’ve shown you today paints a more nuanced picture of 2021’s recovery than the aggregate numbers. In the case of the home ownership/price data, it cautions against too much optimism even though the macro data is quite strong. Home ownership is increasing, yes, but in the cities hardest hit by the pandemic (NYC, for example), this provides much less of a tailwind. On the plus side, faster rising home prices in areas with already high home ownership are a real positive. More consumers in these metro areas will feel a wealth effect.

All this makes us feel “OK” about the role of housing in a 2021 US economic recovery, but still mindful that in many of the country’s largest metro areas the effects will be smaller.