Humming Along With Housing

It’s probably no surprise housing’s been in the doldrums for a large part of the last few years. But recent data suggest the housing market is, in fact, improving.

We’ve often said a housing recovery isn’t essential to an economic or stock market recovery, and that’s still true. For example, looking at economic expansions over the last decade, housing’s accounted for only a small part of growth. And while continued housing improvements today would be a positive, they aren’t necessarily a boon to overall economic growth. Case in point, the economy has grown just fine to date with still-weak housing. But from an investing standpoint, the biggest impact from an improving housing market may be on sentiment.

Late last week, the US Census Bureau reported August housing starts rose 17,000 to 750,000 (annualized)—matching expectations. While still below the historical average, the upward trend is a positive. (See Exhibit 1.)

Exhibit 1: US Housing Starts

Source: US Census Bureau, Thomson Reuters.

Building permits fell 9,000 to 803,000 in August, but the overall trend has, likewise, been positive. Despite the recent dip, permits remain well above starts, suggesting construction activity should continue improving. (See Exhibit 2.)

Exhibit 2: US Building Permits

Source: US Census Bureau, Thomson Reuters.

Sales of existing homes increased 7.8% m/m in August to a 4.82 million annualized rate—a two-year high that easily beat expectations. To us, it really isn’t too surprising housing’s bouncing back: After all, prices are an incentive—low ones can stimulate buyers. Right now, with prices still off from highs and mortgage rates ultra-low, affording a home is becoming, for many folks, easier than renting. The Fed’s recent actions to spur investment (although likely largely feckless considering already historically low mortgage rates) could help ongoing home buying activity, too. (See Exhibit 3.)

Exhibit 3: Existing Home Sales and Median Price

Source: National Association of Realtors, Thomson Reuters.

While home prices are historically uneven and choppy, data are beginning to reflect some sustained increases. We believe there’s good reason to think that’ll continue—perhaps not at a dramatic pace, but increase nonetheless. As a result of the rebound and slow construction trends the past few years, existing home inventories continue to fall from their peaks. As inventories fall, demand rises and construction lags to keep up, it’s likely the impact on pricing only continues to improve. Low levels of home building following the housing bust have greatly reduced the supply of new homes available too.

Exhibit 4: Supply of Existing Homes for Sale

Source: National Association of Realtors, Thomson Reuters.

As the economy continues to improve and with housing affordability near record highs, a slight uptick in demand with such little supply should continue to move prices higher. In our view, these factors, while a (small) drag on the economy in recent years, seem poised to be a (small) tailwind in the immediate future.