The U.S. economy is now in its 11th year of growth, making this expansion the longest in U.S. history. And while there have been some preliminary signs of moderation, the economy has remained out of recession through the first three quarters of 2019. The resilience of the economy combined with low mortgage rates has fueled housing demand in the state, but limits on the supply side have hindered growth in sales and have simultaneously pushed home prices to record-high levels. Accurately predicting the future path of the state housing market requires an assessment of demand and supply pressures. In this article, we examine the current state of the economy, both nationally and statewide, and the likelihood of a downturn in 2020. We then turn to the market forces impacting the state housing market in the coming year.

The national economy and the business cycle

The U.S. economy has experienced periods during which the economy shrinks, known as recessions, and periods in which it grows, which are expansions. Since the U.S. emerged from World War II, we have experienced 11 complete business cycles, defined as the combined time for a recession and the subsequent expansion; for example the peak-to-peak time period. Thankfully, periods of economic expansion are typically far longer than periods of recession. Indeed, the average expansion has lasted 58.4 months whereas the average post-war recession has been just 11.1 months in length. Thus, the Great Recession was an unusually long recession, coming in at 18 months in length; and the current expansion is now the longest in U.S. history, completing 124 months at the end of the third quarter of 2019. The previous record for an expansion was the 120-month expansion during the 1990s.

The National Bureau of Economic Research (NBER) is the organization that reads the economic tea leaves and officially determines when the peaks and troughs of business cycles precisely occur. While the NBER takes into consideration a number of different macroeconomic measures when determining these precise dates, a useful rule of thumb that typically identifies the onset of a recession is when the real (inflation-adjusted) gross domestic product (GDP) growth is negative for two consecutive quarters. 

As can be seen in Figure 1, the economy emerged from the Great Recession in the third quarter of 2009, and its growth has remained in positive territory for nearly all the quarters since. In fact, since the beginning of 2016, the economy has grown at 2% or more on an annualized basis for 13 of 15 quarters, including the first three quarters of 2019. The preliminary examination of real GDP data from the fourth quarter of 2019 indicates that it will likely remain in positive territory through the end of the year, pushing this expansion to 127 months.

Economic headwinds and the likelihood of recession

While the economy continues to grow, the pace of growth has slowed slightly, and there are several reasons for the moderation. First, unemployment levels remain very low by historical standards, as evidenced in Figure 2, and while this creates job opportunities and boosts wage growth for workers, it also creates labor shortages, which limit the ability of firms to expand. As of October 2019, the national unemployment rate stood at 3.6% whereas Wisconsin’s rate was 3.3%. Unemployment rates below 4% are considered to be full employment by economists. Given low birthrates in the U.S., revisions to immigration policy would be one path to ease the shortage of workers, but those solutions are likely well into the future.

A second economic issue centers on trade disputes with some of our strongest trading partners. While U.S.-Mexico-Canada trade agreement is finally being ratified, trade disputes with China and some European countries continue. Restrictions on trade drive up the cost of raw materials and ultimately hurt exports, which is especially damaging to the U.S. manufacturing sector. With manufacturing employment comprising approximately 16% of nonfarm employment in Wisconsin, ongoing trade disputes are especially damaging to the state economy. Indeed, while still low by historical standards, Wisconsin’s unemployment rate has moved up just over half a percent in the last half of 2019. Finally, the economic uncertainty associated with Brexit has been disruptive to European economic growth, and the issue remains unresolved as Great Britain has recently called new elections. These headwinds have certainly slowed overall economic growth both nationally and statewide.

Still, even in the face of these economic challenges, the U.S. economy remained resilient with solid consumer confidence going into the holiday season. In addition, the Federal Reserve, which lowered short-term interest rates three times in 2019 to stimulate an economy that was showing signs of weakness, signaled its intention to pause on rate-cutting. In the December meeting of the Federal Open Market Committee, the body that determines the direction of monetary policy, chairman Jerome Powell indicated the Fed has a “favorable economic outlook.”

This sentiment is echoed by other economic analysts. The Philadelphia Federal Reserve Bank conducts a quarterly survey known as the Survey of Professional Forecasters, which asks 
economic analysts from some of the largest financial institutions and consulting firms for their predictions of future macroeconomic conditions. One of the items asks the survey respondents their assessment of the risk of a negative quarter of real GDP growth over the course of the next four quarters. Negative growth would be a strong signal that the economy is entering a recession. The most recent survey conducted in the fourth quarter of 2019 revealed that even one year out, the risk is deemed to be low. Specifically, although the analysts predicted a doubling of the risk of a negative quarter over the next year, it increased from just a 12.8% risk in the fourth quarter of 2019 to a 25.1% risk in the fourth quarter of 2020. Moreover, the analysts had become more bullish when compared to the previous survey. 

A solid year for the Wisconsin housing market

In the immediate aftermath of the Great Recession, existing home sales and median home prices both dropped significantly. As seen in Figure 3, home sales began improving in 2009, and this was due in large part to the tax rebate programs for first-time buyers that was implemented shortly after the Obama administration took office. By 2012, sales volume was at pre-recession levels, and over the past three years, sales have been stable in the low 80,000 range. Home prices took longer to fully recover, but by 2017, they exceeded the levels of 2007.

Housing market data for December 2019 was not available at press time, but assuming the final month of the year follows the same average pace as the first 11 months of the year, we can extrapolate an annual sales total for 2019 and an annual median price for the year. This exercise suggests that existing home sales will decline slightly and continue to hover in the same range as the past three years, but the median price will likely increase somewhere in the neighborhood of 7.3 percent, rising to just over $197,000 for the year.

Overall, we have a solid economy characterized by low inflation, low unemployment, decent job growth, and 30-year fixed mortgage rates that are within a half percent of the all-time low of 3.35%. So why have we seen such tepid growth in closed sales since 2017, and why are prices increasing so rapidly? The answer comes down to simple supply and demand in the housing market. Demand conditions are strong, but supply constraints have kept sales flat. Strong demand and weak supply has created a market where sales stagnate even as prices increase at more than three times the pace of inflation in 2019.

The ongoing inventory problem

Housing analysts classify a market as balanced when there is enough inventory to last six months. Less than six months of supply signals a seller’s market whereas buyers have the advantage when inventory exceeds the six-month benchmark. As Table 1 shows, nearly all areas are classified as seller’s markets, and these markets have generally tightened over the past 12 months. Statewide, Wisconsin had just four months of available supply in November, down from 4.2 months a year earlier.

When examining counties by their urban/rural classification, it is clear that inventories are lowest in the most urban of counties. Specifically, counties that make up metropolitan areas, which include cities with 50,000 or more persons, had just 3.3 months of supply in November 2019; and counties that comprise smaller micropolitan areas, which include towns and cities with between 10,000 and 49,999 persons, had 4.5 months of supply. Thus, both are defined as seller’s markets. Only rural counties, which are counties with less than 10,000 persons countywide, are classified as buyer’s markets. A similar picture emerges when viewed geographically. Only the North region, which is primarily classified as rural in nature, has a buyer’s market. Finally, tight markets exist in nearly all price ranges, with the notable exception being top-end homes selling at $500,000 or higher.

Why do we have such tight housing markets? First, it is important to note that this is not a case of housing demand growing so rapidly that it has outstripped supply. We have solid demand, and it is not overheated given that the millennial generation has only recently begun to form households and move into owner-occupied housing. Rather, the problem is that we have limited supply of housing. There are three fundamental sources of housing supply: 

• Existing homes that come on the market
• Foreclosed homes
• New construction

None of these sources of supply has been expanding. While final foreclosure data is not yet available for 2019, the number of foreclosures was at pre-recession levels as we entered 2019. See Figure 4. 

Likewise, new construction fell dramatically beginning in late 2006, as shown in Figure 5, and while there has been some modest improvement as the economy emerged from the Great Recession, it has remained relatively flat throughout 2019. This industry is an important source of supply, but it has been hit hard by labor shortages in the skilled trades as well as higher land acquisition expenses and higher costs of materials resulting from tariffs. The increase in construction-related expenses has made it challenging for builders to serve that sector of the market where inventories are tightest, specifically homes under $350,000.

2020 Expectations for the housing market

The current economic expansion is in record territory, and we opened 2019 with significant concerns that we may be moving toward recession by the end of the year. The good news is that it appears that the economy is settling into a period of continued, albeit slower growth. Recent developments on the trade front will hopefully help to sustain the expansion for at least another year. There are reasons to be cautiously optimistic about prospects for the state housing market. First, there are preliminary indicators that the listings of existing homes are beginning to stabilize. See Figure 6. As more existing homes find their way onto the market, this will allow sales to grow and simultaneously reduce the pressure on prices. Baby boomers are starting to transition out of their homes, and that trend will gain momentum as boomers continue to age. Second, the Fed’s movement from rate-increasing to rate-cutting and now holding steady is also good news. It suggests that the Fed considers inflation under control and the economy healthy but not overheating. That means that mortgage rates should likely remain steady in the upper 3% range over the next 12 months. The combination of slower price appreciation and stable mortgage rates under 4% will keep our housing affordable. Thus, we anticipate a solid housing market for 2020, with a return to slight growth in sales and moderated growth in prices. For now, the risk of recession in the coming year appears to be low. 

David Clark, Ph.D., is a professor of economics at Marquette University and principal at ECON Analytics, LLC, and serves as a consultant for the WRA in the analysis of home sales data as well as in the preparation of the monthly Wisconsin Housing Report. For more information, contact Clark at 414-803-6537.