A leading global economist suggests the current US economic phase bears a strong resemblance to the mid-1990s. If oil prices have peaked and inflation pressures are easing, consumer spending could reaccelerate and the housing market may see a gradual recovery.

Piper Sandler's Chief Global Economist Nancy Lazar made this assessment in a client note. She pointed out that the recent decline in crude oil prices, if it signals the end of the energy shock, should lead to improved real incomes, thereby supporting consumer spending. Concurrently, the housing market is showing three positive signals: sustained growth in nominal personal income, a decline in new home prices, and the potential for further decreases in mortgage rates.

Piper Sandler analysts characterize the current cycle as more akin to 1996 than 1999, a distinction they believe is crucial for investor asset allocation. The 1996 scenario implies an economic soft landing and moderate recovery, whereas 1999 points to overheating followed by a sharp correction.

Drawing Parallels with the 1990s

Lazar's central argument is built on a historical comparison with the 1990s. Her team notes that the current cycle is more similar to that decade, a period when home price appreciation largely kept pace with income growth. The fundamental reason, they argue, is that the Federal Reserve has not kept interest rates suppressed below nominal GDP growth for extended periods, unlike in 2005, 2015, and 2022.

Regarding the specific policy path, analysts highlight similarities between the two periods: the Fed cut rates by 75 basis points in 1995, and it is projected to cut by 175 basis points cumulatively in 2024-2025. Economic growth reaccelerated in 1996, and a similar recovery led by industrial activity is anticipated for the second half of 2025.

Piper Sandler clearly distinguishes the current cycle from 1998. That year saw the Fed implement excessive monetary easing, fueling a late-cycle boom in the economy and markets that eventually turned into the 1999-2000 bubble. Analysts believe the current Fed policy is more restrained, thus posing a lower risk of excessive bubble formation.

Factors Improving Housing Affordability

Lazar's team identifies three factors working in concert to improve housing affordability. First, nominal personal income continues to grow. Second, new home prices have already decreased. The combination of these two factors has brought the ratio of new home prices to income down to a more affordable level.

Notably, new home prices are currently lower than prices for existing homes, a relatively rare occurrence. Analysts believe this price gap will act as a constraint, preventing significant price increases in the existing home market. Regionally, affordability metrics for existing homes are already showing signs of improvement across various areas.

However, the team also emphasizes that while the direction has shifted, the absolute level of housing affordability remains low. This suggests there is significant room for the recovery to continue.

Early Signs of Market Improvement

Piper Sandler lists several leading indicators it is closely monitoring to confirm the sustainability of the housing recovery. Mortgage application volumes have begun to rise. The National Association of Home Builders (NAHB) sentiment index is expected to gradually increase. Foot traffic at home improvement and building material retailers has also bottomed out and is showing signs of a slow recovery.

On the interest rate front, mortgage rates have already declined significantly from their post-pandemic highs. If energy prices continue their downward trend, there is potential for rates to fall further, providing additional support for the recovery in housing demand.

History Rhymes but Doesn't Repeat

While drawing these conclusions, Lazar's team explicitly acknowledges differences between the current period and the 1990s, expressing a cautious view of the analogy with the phrase "history often rhymes, it does not repeat."

The analysts' core judgment is that if Fed policy remains relatively restrained, the risks of economic overheating and asset bubbles will be correspondingly lower. The current cycle is more likely to follow the 1996 trajectory rather than slide into a late-1990s style boom and subsequent sharp bust. For investors, the key variable to validate this outlook remains whether the trend in oil prices and the inflation turning point materialize as expected.