By New Deal Democrat
Let me start out by quickly explaining why I pay so much attention to the housing market. It is because no other single economic indicator so accurately foretells the health of the economy 12-18 months later than housing, and in particular new housing sales and construction. Both the Conference Board and ECRI include housing permits among their leading indexes. Professor Edward Leamer of UCLA has gone so far as to say that housing IS the economy.
With yesterday's report on pending home sales, the first 2/3s of 2014 is in the books. Here's what housing permits (blue), new home sales (red), and existing home sales (green) all look like normed at 100 to their respective 2013 highs:
As you can see, the overall appearance is one of stagnation, with a slight improving trend since the beginning of 2013. Only new home sales have made a new high this year, as of this month (and I expect that to be revised away next month).
A more close up look shows that earlier this year was the trough of the housing slowdown, and that lower mortgage rates - down over .5% from the beginning of this year - are beginning to have a positive impact.
As I have pointed out before, the typical pattern in the housing market cycle is that:
- 1st, interest rates turn
- 2nd, permits, starts, and sales turn
- 3rd, prices turn
- 4th, inventory turns
In this installment, I'm going to focus on interest rates and sales.
Here is a graph, covering the last 30 years, of the YoY% mortgage rates (inverted so that higher rates give a lower value, blue) vs. housing permits, YoY change in 100,000s (red):
Here's a close-up of the last 5 years through August:
Interest rates on mortgages went up from 3.4% in early May 2013 to a high of 3.6% in August of last year. On 16 of 19 occasions since the end of World War 2, that big a change led to a YoY decline of at least -100,000 in permits. In this case, housing permits remained slightly positive this year (with the exception of May, when they were -0.5% lower YoY).
But the decline in interest rates from just over 3% to as low as under 2.4% earlier this year, and ultimately becoming less than they were a year ago suggested that we would start to see some improvement in permits, sales, and starts, although probably muted since rates have not returned to 2013 lows. In August, all three measures of new housing improved.
Permits, starts, and sales
Here is a graph of the change, in thousands, YoY of starts (blue), permits (red), new home sales (green), and existing home sales (orange) (note that the St. Louis FRED does not track pending home sales):
Next, here is the YoY% change in the same four statistics:
Both of these graphs show the clear deceleration in the housing market through 2013 and into outright declines in the early part of this year. In the last two months, however, permits, starts, and new home sales were all positive YoY. Only existing home sales remained negative YoY.
Finally, here is pending home sales (compared with existing home sales, h/t Forex Live):
The trough of the housing slowdown almost certainly was in March or April. There has been significant improvement in the last several months.
A note about the impact of demographics on permits, starts, and sales
One of the exceptions to the rule that interest rate increases always lead to a decline in the new housing market took place beginning in the late 1960s, as Boomers entered adulthood. While the single family home market did decline, the multi-unit market (condos and apartments) boomed. A similar dynamic appears to be playing out now with the Millennial generation. Below is a graph comparing permits for single family homes (blue) vs. multi-unit structures (red):
Since late 2013, multi-unit construction has been responsible for virtually all of the small increase in residential construction.
In summary, through August 2014:
- Permits are down -6% from their October 2013 high, but up +7% from their January 2014 low
- Starts are down -14% from the new high they set last month per revised data, and up +7% from their January 2014 low
- New home sales are up +37% from their March 2014 low, and at least as of now, at a 6-year high.
- Existing home sales are down -6% from their July 2013 high, but up +10% from their March 2014 low
- Pending home sales are down -3% from their July 2013 high, but up +11% from their February 2014 low
While I expect housing construction and sales to slowly improve over the next 6 months or so (due to a better interest rate environment this year), the overall stagnation of the last 16 months has likely been feeding into the broader economy, and that's why I thought the second half of this year would see deceleration, and I still expect that deceleration to show up by year end.