2018 was a Goldilocks kind of year. Not too hot, not too cold. The ends of 2018 were a little bipolar, starting kind of hot but ending a little cool. Speculation about 2019 malaise could turn out to be pure smoke, but we’re not through the recession risk yet.
Let’s take a quick review of Goldilocks. Goldilocks is enjoying her stroll through the forest. She runs across a nice little shack and walks inside, uninvited. She eats the cold, hot, and just-right porridge and then goes upstairs to sleep.
Then, the bears come home. And all hell beaks lose. But not really. After the bears cause some stir with Goldilocks, the two parties end up as friends. And they all live happily ever after.
Or so one version of the story goes.
This is the version we’re likely to see in 2019 after a bearish end to a Goldilocks 2018.
Will Goldilocks and the bears become friends? We’ll see. This part of the story is unwritten. Let’s take a look at how we got where we’re at.
First, let’s take a look at housing starts. Housing starts ended 2018 at about 1.2 million. Not bad, but not great.
In the lead-up to prior recessions, we saw housing starts peak at 7, 9, 18, 6, and 4 quarters before an economic downturn came around, and an average of 2.1 million. If Q1 2018 is the theoretical peak, then that puts the earliest date of the next recession as Q2 2020.
And that ignores the still low-level of starts. It will probably take another 3 years to get to the lowest of the previous peaks of 1.7 million.
- 120 million in Q1 2006; recession began in Q4 2007;
- 722 million in Q4 1998; recession began in Q1 2001;
- 899 million in Q1 1986;recession began in Q3 1990;
- 114 million in Q2 1978; recession began in Q1 1980;
- 424 million in Q4 1972; recession began in Q4 1973.
Bottom line: housing starts say the economy has much more upside than downside in 2019. The year 2018 moved slowly in a healthy direction, but we’re still in the orange, far away from the dark blue.
Housing starts are still trending upward. Behind this are new households (commonly known as household formation). Through the first 11 months of 2018, average household growth was up over 2 million from 2017. Presuming when the final figures come out for the end of 2018, household formation in 2018 will have been the second best on record.
The only year to have surpassed 2018 was 1982. That was the year Paul Volker and the Federal Reserve smashed inflation – albeit at the cost of a terrible recession. Interestingly, the current Fed seems to be on a similar war path. Funny how history repeats itself.
What happened the year after the household formation boom of 1982? The year 1983 saw household formation drop from 2.7 million to 0.8 million. If history repeats itself, 2019 household formation will be less than 1 million. Still growing, but not nearly as many households needing homes.
What happened with housing supply through 2018? Well, a robust start to 2018 ended with some signs of weakness. Housing supply jumped – mostly in large, very expensive urban areas (such as San Francisco, California) – to end 2018. We’re still in the light orange area, though. Blue is still a nice distance away.
What else did we see in 2018 that’s indicative of 2019? In future posts, we’ll be discussing the homeownership rate, housing prices, net worth, corporate profits, housing sales, and a host of others indicators.
Goldilocks is quarreling with the bears right now, but she’s probably going to come through OK.