Housing (XHB  ) has been one of the best performers in 2019 and will enter 2020 with strong momentum and favorable fundamentals. Recent economic data shows that the housing market is in its strongest position since early 2018. While many sectors are still recovering from the deceleration in growth since early-2018, housing has already broken out past these prior peaks from a stock price perspective and also based on indicators like new starts, building permits, and total construction.

Breaking Down 2019

Despite increases in home prices, affordability has increased as well due to the stunning decline in mortgage rates over the past 14 months. In late 2018, the average mortgage rate for a 30-year fixed loan was around 5.2%. Currently, it's at 3.9%. This represents a significant reduction in financing costs and ensures that demand remains strong.

Mortgage rates dramatically declined last year, as the Fed unwound its rate hikes in 2018. Monetary policy became marginally hawkish in late-2016, and mortgage rates increased from 3.6% to 5.1%. This did chill momentum in housing and starts went from growing 10% to barely flat. Thus, some part of housing's strength is pent-up demand returning as mortgage rates moved lower.

At the time, there were concerns that housing's bull market had ended. In hindsight, it's clear that this was a mere two-year reset. Further, the housing market displayed resilience by not turning lower even with a major spike in rates.

2020 Looks Promising

The major factor behind the housing market's resilience from 2016 to 2018, the boom in 2019, and promising prospects next year are its favorable supply-demand dynamics. Since the financial crisis, new homes haven't been built at a fast enough pace to keep up with population growth. Housing supply is at multiyear lows. This in combination with strong affordability should ensure that bull market conditions persist.

Housing thrived in 2019 despite slowing economic momentum due to falling rates. 2020 looks to be a year of accelerating economic momentum. However unlike increasing growth in 2016 to 2018, this time rates will stay in-check as Fed Chair Powell's recent post-FOMC press conference revealed that rates won't be increased, until inflation is "persistently" above its 2% target.

Longer-term factors behind demand are supportive as well. For example, the jobs market is quite strong with wage growth at the highest pace in many decades especially for incomes in the bottom half. Secondary labor market indicators like the QUITS rate show that workers have long-term confidence that they can get a job which correlates to people making major purchases. Similarly, measures of long-term economic confidence and intentions to make large purchases are also at multi-decade highs.