In an articled titled “America's homebuilders haven't felt this good since 1999” found on Yahoo!Finance dated December 18, 2017, it is noted that homebuilders confidence is “…now at a higher level than it was at any point during the housing bubble.” Does this mean that a crash in the housing market is coming?
To clarify whether a crash is coming, we’ve taken the data that is referenced in the article and laid bare the elements of a real estate market cycle. In the article it is said that the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) “…hit an 18-year high of 74, topping expectations for a reading of 70 and well above last month’s reading of 69.”
As we’ve pointed out, based on the work of Roy Wenzlick, there is an approximate 18-year real estate cycle for peaks and troughs. When we look at the HMI chart (full cycle in red), we can clearly see that major cycle lows have an 18 year period of separation. While this is only a coincidence, it fits well with the work of Wenzlick who confidently shows this cycle (1795-1974) in his writings from 1930-1974.
The most important take away from the chart above is that all-time highs in the confidence of home builders does not equate to the end of a secular boom in real estate. Notice that a new high was seen in 1993, 1998 and 2005. It was the 2005 peak that was the final high in confidence before the market began a decline to the ultimate 2009 low.
We suspect that any decline in the homebuilder confidence, for now, will fit in with the equivalent period from 1991 to 2005, a time when recessions are experienced and prices decline but that a secular rising trend remains in place.