A Midyear Look At The Housing Market

Includes: ITB, PKB, REZ, XHB
by: Hale Stewart

By New Deal Democrat

This is a good time to update my look at housing. While housing leads the rest of the economy, interest rates lead housing. Further, there can be a demographic boost or drag, depending on the relative size of the generation entering prime home-buying years, roughly ages 25-35.

The order in which the housing market functions is:

  1. Interest rates turn
  2. Housing sales turn
  3. Housing prices turn
  4. Inventory turns

With that in mind, let's take a look at each of these.

First, here are the mortgage interest rates (blue, inverted) compared with housing permits (red, in 100,000's annualized). I have selected permits, because they cover the broad new housing market, and are much less volatile and slightly more leading than housing starts:

After the 2013 "taper tantrum," mortgage rates spiked and housing sales stalled, with several negative YoY months. As rates declined close to their 2012 lows, the housing market has responded with gradual improvement. The recent spike in rates, meanwhile, as in 2013, has caused potential buyers to rush to lock in low mortgage interest rates, with a spike in permits as well. This is very bullish for the economy over the next 12 or more months.

Next, let's compare the YoY% change in starts (blue), permits (red), new home sales (green), and existing home sales (brown):

This is a more comprehensive view of the market. It clearly shows the early 2014 stall and the recent surge.

Now, let's compare housing permits (red) with the Case-Shiller home price index released yesterday (green):

Even more telling is the graph of prices of new single-family homes (blue) and existing home prices (red):

Last year's stall in sales has filtered through into a stall in prices.

Finally, here is the Case-Shiller house price index (green) compared with the inventory of existing homes (blue):

Inventory is flattening, after rising last year following prices.

To reiterate, the surge in housing this spring is very bullish for the US economy as a whole over the next year. Should the recent spike in interest rates persist, then like the result of the "taper tantrum," there could be trouble in the housing market later in 2016.

New Deal Democrat, XE.com