The housing market is one of the key tells on the overall health of the economy. Home values are perhaps the most visible sign of how the housing market is doing, but there are a number of variables you can look at to assess the market’s overall health. For example, the number of mortgage applications can indicate how many buyers and sellers there are in the market. Even looking at how much is being spent on home appliances and furnishings can provide a good idea of how much the consumer is spending.
My go-to data point is lumber prices. It’s the cornerstone of one of my primary market risk signals precisely because of what it tells us about the housing market. The average home has about 16,000 board feet of lumber. Lumber prices are a direct tell on home construction, industry demand and, ultimately, home prices.
Home prices are already on the decline, especially along the West Coast, but several key indicators suggest that an even larger housing crash may be nearing. Let’s take a look at some of the evidence pointing to a potential housing market crash.
Lumber Prices
Unfortunately, what lumber is telling us right now isn’t good. In fact, it hasn’t been for a long time. Lumber has been steadily declining since the beginning of 2022 and has fallen by about 70% since that peak. In fact, lumber prices are actually lower today than they were at the beginning of 2020, right before the start of the Covid-19 pandemic.
Quite simply, low lumber prices mean a lack of demand for building materials. In turn, a lack of demand means home construction slows and builders and home-sellers need to start lowering prices in order to move inventory. Even as the S&P 500 has rebounded strongly in 2023, lumber prices have remained subdued.
Home Prices
Home prices, as represented by the Case-Shiller Home Price Index, have been on the rise since 2012 but really accelerated post-Covid recession when households had plenty of stimulus cash on hand. In a lot of cases, realtors weren’t even writing up offers for below asking price, and that helped drive home prices up to unsustainable levels.
With the economy slowing and higher mortgage rates driving a lot of potential buyers out of the market, home prices are now starting to fall. They could have much further to fall if the market keeps working off the excess that’s built up over the past few years.
Construction Sector Employment
This doesn’t get a whole lot of attention, but it’s important. The headline unemployment rate and non-farm payroll numbers get all of the attention, but if you dig down below the surface in the most recent report, you’ll see that employment in the construction sector is actually shrinking. If the demand for new home construction falls, homebuilders start to lay off workers. This could be the very early stages of a downtrend.
New and Existing Home Sales
Home prices are a direct reflection of activity within the housing market. If the economy is in good shape and consumers feel good about their jobs, income and savings, they’re much more willing to consider upgrading to a larger, better or more expensive home. Despite strong wage growth and a historically low unemployment rate, look at what’s happened to home sales. They’ve experienced a sharp decline in a way that’s not all that dissimilar to the financial crisis.
Part of this is due to higher mortgage rates and soaring home prices, but both are reasons why the housing market could be facing a significant repricing.
So, Is a Housing Market Crash Coming?
Housing is one of the cornerstones of the U.S. economy. When it’s struggling, it tends to pull everything down with it. Right now, I’m seeing conditions that favor a major pullback in the housing market. In fact, it’s likely already started and there’s a lot of evidence supporting it. This could be the driving factor that finally pulls the economy into recession in the near future.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Michael A. Gayed is the Publisher of The Lead-Lag Report, and Portfolio Manager at Tidal Financial Group, an investment management company specializing in ETF-focused research, investment strategies and services designed for financial advisors, RIAs, family offices and investment managers.
InvestorPlace readers that are new subscribers to the The Lead-Lag Report can receive a 30% discount by entering the promo code “InvestorPlace30” with your order.
