In our last perspective, we declared February 2005 to be the best month ever to be a home builder. Annual new-home sales have risen 76 percent in the last 10 years, unsold inventory is low, prices are 12 percent higher than they were one year ago, and the economy is on the upswing. We asked ourselves, “How did we get here?” and we learned that job growth and mortgage rates really had very little to do with it. Beginning today, we will place more emphasis on two additional variables when helping executives strategize for the future.

Prior to 1995, the World Made Sense to Economists

It used to be that job growth and mortgage rates were all that mattered, but that is not the case anymore.

Jobs and Housing: From 1972 through 1995, new-home sales and job growth were highly correlated, as shown in the first chart below. However, since 1995, there has been no correlation at all.

Mortgage Rates and Housing: Except for two periods since 1972, new-home sales and mortgage rates have been highly inversely correlated, as shown in the second chart below. The two periods are:

1. 1990-1991, when the collapse of the S&L industry left no capital for home builders, and

2. 1995-2000, when new-home sales rose 31 percent while mortgage rates remained relatively stable.

What unprecedented event began in 1995 that set the stage for the greatest 10-year housing boom in history? While the demographics for home-building are good, they are not good enough to explain a 31 percent increase in new-home sales from 1995-2000, while job growth remained flat and mortgage rates remained stable.

Ten Years of Unprecedented Wealth Creation

What happened in 1995 was the beginning of an unprecedented level of wealth creation that has fueled the greatest housing market in history, despite modest job growth and extended periods of flat mortgage rates.

  • 1995-2000: From 1995-2000, the stock market rose 320 percent and, just as it began its collapse,

  • 2000-2004: From 2000-2004, homeowners’ equity rose 40 percent, which is the greatest four-year increase in history. Equity would have risen by more, too, if mortgage debt hadn’t swelled. Falling mortgage rates certainly contributed to the wealth creation, but the rise in sales volume is much more than can be explained simply by falling rates.

Lessons Learned

For years, we have been helping building industry executives monitor housing market trends, with an emphasis on job creation, housing supply and affordability/mortgage rates. Beginning today, we will suggest that they place more emphasis on analyzing homeowner equity and stock market wealth before making strategic decisions for the future.

John Burns is the founder of Real Estate Consulting in Irvine, Calif., which monitors changes in real estate market conditions and provides consulting services, including strategic planning, market research and financial analysis.


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