Housing continued to surprise on the downside with the Commerce Department’s report that new home construction was off 14.6% year over year bringing new home starts to the lowest levels since 2000. The anecdotal information from the industry is that the worst is not yet behind us with both DR Horton Inc. (DHI) and Toll Brothers Inc. (TOL) indicating that cancellations are over double their historical averages. With nearly 50% of the homes sitting empty belonging to speculators, the affect of downturn on the real American family is still undetermined.
The Fed, for its part, seems to be becoming increasingly comfortable with the interest rate policy with Fed minutes and comments made this week suggesting that rates seem appropriate for market conditions and further action is unlikely in the short term. The Fed has continued to make it abundantly clear that inflation is their chief concern and growth will be sacrificed if necessary.
TOL/DHI 1-yr Performance Chart
The pressing question facing the markets and keeping a cap on things is, how will the downward spiraling of the housing market effect growth of the broader economy? If last quarter is any indication GDP will continue to surprise on the downside. Last quarter’s GDP was a lean 1.6%, dragged down unexpectedly by lower than projected housing numbers. As we see housing numbers propagate this quarter’s data, the surprises are again to the downside which is leading economist to reduce GDP estimates. Last quarter the drag on GDP from housing was -1.1%; this quarter may be worse.
So will the bursting of the housing bubble take the market with it as it did when the tech bubble burst in 2000? Consider this, in 2000 the tech laden NASDAQ had nearly 80% of its value in tech and telecom, and the S&P500 had nearly 30% in these areas. Today less than 5% of the S&P500 and less than 2% of the NASDAQ are directly exposed to housing. It’s easy to do the math, even if the building sector gets cut in half the effect on the indexes will be marginal. The bigger problem is the potential that we will finally get the dreaded consumer lead recession that economists have been so worried about.
There’s only one source I trust for advice on such an important topic, I like to call it the collective consciousness, most people call it the stock market, which also happens to be the culmination of all the information available with a built in discounting mechanism that usually accurately predicts future economic growth six to nine months in advance. Right now the stock market is screaming Goldilocks. There is no doubt that adjustable rate mortgages are a concern, but persistent low interest rates combined with creative new financing options are giving debt burdened consumers a way out and providing them with ability to continue to spend regardless of how poor their balance sheets look.