Housing prices stalled. Data shows Michigan economy slowing.
Earlier this month while I was in the office, I received a rather frantic call from a long-time client and friend of mine, “Tom, I need you to sell my house! I think house prices are going to fall!”
For the sake of keeping him anonymous, we’ll call him “Burt.” Burt had been hearing from some of his neighbors that they were having trouble selling their house now that the summer was over. So he was kicking himself for not putting his house up for sale earlier. I asked Burt the reason for his haste. He said he was concerned about his house becoming worth less than his mortgage.
I knew that Burt liked his house and had no good reason to leave his neighborhood as he worked nearby and had family in the area. So I went back to Burt and said, “Burt, since you’re still planning on working in the area for the foreseeable future and are happy living in your home, I wouldn’t be too concerned with all these external factors that are going on in the world.”
I told Burt that a person shouldn’t sell the home they live in simply because housing prices are at a peak. I reminded him that the market is still quite high and if he still really wanted to sell his house, he could. Even during the fall and winter, people need houses and may be willing to pay a higher price if it’s the house they want. Summer newly-weds, for example, is a demographic that buys houses well into the fall and winter.
I shared with Burt some of my thoughts about housing prices and what the historical data was showing about how housing prices go up and down. I told him that he stood a good chance of riding out any downturn. Burt agreed. He thanked me and I went back to work.
I find that when times are uncertain, one can gain confidence when they stand back and look at how far this housing market has come since the recession. Therefore, I’d like to share with you what I think may be finally causing the smoking housing market to cool and how we can think about it.
Was the Summer of 2019 the Summer of ‘69?
Burt was right in recognizing that the housing market has cooled somewhat as we’ve moved past Labor Day. Leading economic indicators combined with news stories like the GM strike and the China trade war are flashing warning signs that the state of Michigan is entering a slowdown. To what extent this slowdown will affect house prices remains to be seen over the coming year.
While metro Detroit area housing prices are not in full retreat, they stand on the edge of a knife. My conversations with Burt and other clients these past two months seem to indicate that the crummy news is affecting people’s attitudes about the housing market. Burt’s not the only one who gets jumpy at the thought of his house becoming less than what he owes on his mortgage.
New stories are causing Metro Detroiters to think differently about the Michigan economy
When I consider my clients muted enthusiasm towards house prices with events like the GM strike and the China trade war, it leaves me wondering if these new opinions about the Michigan economy will impact house prices.
It’s possible that a new real estate narrative emerging in the metro Detroit area. Such events could led people to believe the economy is slowing. Folks could react by tightening their spending, causing an actual economic slowdown. If decreased spending occurs, it could prompt people like Burt to believe that they need to sell their home now before prices dip lower.
Granted, any new narrative comes at the heels of what was an eight- year trend of rising house prices and a growing enthusiasm towards the idea of owning a home, especially with my millennial clients who just recently entered the housing market in significant numbers. There is a lot of momentum that has built up around the idea that house prices are rising. Even if the economy turns down, these ideas will stick around for a bit.
So, while prices have cooled, they are not in full retreat. However, I am not sure that prices will pick back up with the same buoyancy that we experienced this summer given the downward trend in the metro Detroit economy.
Since Burt, myself, and others are thinking these less than optimistic thoughts, I thought that we should look at some leading economic indicators to see if the stories we’re hearing are reflected in the economic data.
A Bird’s-Eye View of Metro Detroit Housing Prices
To see whether my clients’ views and the gloomy news stories matched with leading economic indicators, I looked at local economic data of the metro Detroit housing market.
In most cases, house prices should matter little in whether or not you’re contemplating selling your primary residence, but if you’re a real estate investor, or a homeowner curious about the condition of the metro Detroit housing market, there’s some key data points that are worth looking at.
The best resource that gives you a bird’s-eye view of metro Detroit area housing prices and the market’s performance over the past couple decades is Standard and Poor’s (S&P) 500 Case-Shiller Core-Logic MI-Detroit Home Price Index. This index is made using data on repeat sales of single-family homes. It is widely used for comparing changes in house prices.
So looking at the Detroit Home Price Index, we see one big hump, a dip, and then the start of another big hump.
If housing prices over the past couple decades in Detroit were an animal, they would be a camel!
I’m kidding, you know we’re all tigers.
I joke to point out that housing prices in metro Detroit stand virtually toe-to-toe with where they were in March 2006—right before the housing bubble began to burst:
“Hang on, since housing prices are at where they were before the crash, does that mean there’s about to be a crash tomorrow?”
Very likely not tomorrow. Conditions in the housing market are very different today than what they were in 2008. Currently, banks are stricter with their lending standards and households are better positioned to handle their mortgage. However, its important to note that the housing market is a cyclical industry with ups and downs and does not climb higher forever.
The Detroit Home Price Index gives us a sense of how bad the last crash in home prices actually was: a 47 percent drop occurred from the index’s high of 127 in March of 2006 before its low point of 66 in April 2011. Even with the $787 billion fiscal stimulus bill that was passed in February 2009, it still took a few years for housing prices in metro Detroit to start their upward march. Since that low point in April 2011, housing prices in metro Detroit have soared 92 percent. Wow!
Now in October 2019, we are more than eight years in to a long climb in housing prices. This past summer was remarkable with buyers in a frenzy over a short supply of houses. Enthusiastic buying is often indicative of a housing bubble, or a run-up in prices brought on by a demand for houses, a constrained supply, and the optimism that prices will continue rising in the future. You’ll see in the graph above that “Housing Bubble #1” occurred before the last recession and “Housing Bubble #2” describes our currently inflated housing market.
Between me and you, I think we’re in a bubble. Housing Bubble #2 jives with my experience selling real estate this summer. Frequently, my clients received what they asked for and more. And, while my own antidotal evidence is only one factor I consider when considering whether home prices are high, the “facts on the ground,” are often ones most valuable insight into housing prices.
Leading economic indicators of the Michigan economy
With the bird’s-eye view of the housing market showing where we came from and where we’re going, let’s now look at the downward trend the Michigan economy has taken the last couple months by looking at leading economic indicators.
Leading economic indicators are factors that suggest whether the economy is getting better or worse. They are considered “leading” because they change before the economy itself changes direction. They act as sort of “canaries in the coal mine.”
Leading economic indicators include factors such as: where interest rates are at; how many products people are buying; how many goods companies are manufacturing; and how much investment is being made in the economy.
The Federal Reserve Bank of St. Louis (FRED) puts these leading economic indicators together into what they call a “Leading Index for Michigan” that provides insight into where the Michigan economy is heading:
Alas! The Michigan economy is heading in a negative direction according to the graph (see the red arrow). Granted, this index is for the entire state of Michigan but if what’s good for the goose is good for the gander (and the negative is true), then the metro Detroit area is headed in the wrong direction.
Furthermore, these numbers seem unlikely to get better over the next couple months. Given the current strikes going on at General Motors (GM) between their corporate office and the United Auto Workers (UAW), these events will impact future economic numbers given the idled factories, reduced worker pay, and reduced spending at businesses that support the autoworkers.
Burt’s concerns are not completely unfounded! Yet, he should not sell his house on a whim. Understanding that the housing market goes up and down over time gives us confidence that we can eventually ride out (and profit from) whatever housing prices do in the future.
