The State Of The Housing Market And What It Foretells For Banking

Housing and Credit

Home prices and trends are thought to be a leading indicator of bank credit, and so we pause to analyze what 2018 is telling us and how it could impact our future in the banking industry. December existing homes sales came in at 4.99 million units or below the 5.24 million units expected. That continued the trend of weaker demand in 2018. Luckily, we can correlate much of that drop in demand and pricing to higher interest rates and inflated home prices against a backdrop of flat income. As a result, home affordability went from about 15.8% of income at the start of the year to 18% by the end of 2018.


Homes Sales and Zillow


To start, it is worth pointing out that previously bank credit departments had to either have a Bloomberg terminal and/or pay for more granular Case-Shiller data. Over the last couple of years, Zillow now publishes much of the same data, and more, free for bankers to use.


What the data shows is that seasonally adjusted home prices rose 7.6% as a result of stronger demand at the start of the year. Buyers anticipated higher rates and helped drive up pricing. Helping this trend was that housing supply, or inventory, decreased 0.4% for the year. 


US Seasonally Adjusted Home Sales


2018 year-to-date home price change by state:


2018 YTD Change in Home Prices


Higher prices hurt sales, which dropped by an average of 0.3% on a seasonally adjusted basis across the U.S. Here is a break of the change in home sales volume by state for 2018:


2018 YTD Change In Home Sales


Much of the headlines in the press are driven off the number of price cuts that are taken place in the market. In the media’s defense, at the end of 2017, 12% of listings had price cuts compared to 21% at the end of 2018. Despite those cuts, the average sales price is still relatively strong as can be seen in the above data. In addition, some of these price cuts were a result of sellers pricing their homes high and not recognizing that the market has slightly softened.


Growth at the upper-end of the market (the highest 33% of housing prices) is slowing the fastest which is consistent with higher rates. The bottom-third of the market has seen a fast pace that has remained steady.

One other aspect of housing is the fact that rent growth slowed in 2018. After growing at a torrid pace in 2017, average rents (for both single and multifamily) have largely been stable throughout last year at $1,440 per unit. Looking forward, rent growth remains positive at an estimated 1.3% for 2019.


Side Note – Monitoring Bank Accounts


The Bank account is still the primary source of liquidity for down payments (below). This is why, it is critical for banks with mortgage operations or retail banks that look for mortgage referrals, to monitor bank balances to be the first to know when customers may entertain a home purchase. Bank balances have a distinct profile and can be used to predict home buying intent with a high degree of accuracy. 


Probability of Using Different Instruments for Down Payment



Putting This Into Practice


Research shows that housing prices have a significant impact on economic growth as changes in household wealth tend to have a direct correlation to consumption. Even more important, is the effect from the change in collateral values allowing households greater access to capital which further spurs economic growth in good times. All-in, these two effects account for approximately 39% of economic production.

Because of this strong correlation, banks pay attention to changes in the housing market not only for an indicator of their mortgage operations but as a predictor of future economic trends and their impact on both retail and commercial credit. While current data shows the housing market is softening, price appreciation remains positive and the fundamentals remain strong.


Most of the concern over the housing market is largely a result of negative trending data associated with the higher rates and lower affordability. Given that homes are still appreciating at an estimated 6% pace and inventory continues to shrink, housing data should stabilize.


The takeaway here is that housing is showing signs that banks should devote more resources to monitoring in order to remain ahead of risk forecasting. Should further deterioration occur in a stable rate environment that may be a harbinger of a downturn. However, until that happens, there is a reason to believe that the housing market will continue to be a driver of US economic growth.