On today’s show we’re talking about opinions. The nice part about opinions is that there is no shortage of them. The world is unlikely to run out of them any time soon. Last week we reported on the podcast that Fannie Mae had published their housing confidence metrics showing a very high consumer confidence index as it relates to housing.
A new report published by CCN paints a far more pessimistic view of the market. The report referenced new guidance from Home Depot which has lowered its guidance on both revenue and earnings for 2020. They cite several factors for the lower guidance. There is an acute shortage of homes at the entry level of the market. Homes in this category are those priced below $200,000. The housing market is also experiencing a shortage of mid-tier homes, that is, those priced between $200,000 and $750,000.
The author draws the conclusions that the shortage of supply combined with a possible future increase in interest rates could cause the housing market bubble to burst in 2020.
The author went on to say, “In all, the U.S. housing market is suffering from a lack of supply. This could prove to be its undoing next year as buyers are likely to be priced out of the market if mortgage rates continue to tick up. Americans are already under duress, as evident from four straight months of declining consumer confidence.”
When I read things like this, I sometimes find it hard to make sense of the logic. So I read the article 4 times. Each time, I tried to follow the chain of logic that would lead to the outcome the author is claiming.
Yes, the consumer confidence has fallen for four straight months. It fell from a high of 135 to 125.5. In the past month the index fell from 126.1 to 125.5. A measure of 100 is considered neutral. While it is true that consumer confidence has fallen slightly, it is still considered well into positive territory and is consistent with what the folks at Fannie Mae reported last week.
The author says “Consumer confidence is also low” which is an outright misrepresentation of the data. I’m sorry, consumer confidence is not low, it has dipped slightly, but remains incredibly high, well above historic averages. For contrast, consumer confidence hit a low mark of 60 back in 2013 and didn’t reach 100 until mid-way through 2016. The author of the report seems stuck on pushing a particular narrative and is quoting numbers that actually contradict his conclusions. It’s almost like they’re asking the reader not be confused by the facts.
When there is a shortage of supply and an excess of demand, it has the effect of pushing prices up. That’s exactly what we’ve seen. The shortage is driven by population growth and by the millennial generation finally getting into home ownership. The number of new homes constructed is not keeping pace with population growth.
Where we are starting to see bargains is in the upper segment of the market. These larger homes are selling at a relative discount to the market on a per square foot basis. We call this price compression.
Unless the demand evaporates, we can expect continued upward pressure on housing prices at the bottom of the market. We are seeing prices fall in areas where people are moving out.
So did Home Depot lower its guidance? What does it really mean, and what is driving it? Could it be that a smaller number of homes on the market would in fact reduce the revenue at Home Depot as the author suggests? I read the entire transcript of their investor conference. The author has it wrong.
In my view the author of the article has an agenda. They’re trying to paint a picture that the real estate markets have some downside risk. I get that. I have no problem with having that point of view. If the author wanted to hi light the downside risks, there’s ample data they can find to make that argument. There’s no need to make stuff up.