An Important Leading Indicator of the Economy: Housing Activity
Housing indicators are crucial to monitor as they provide valuable insights into the health and stability of the housing market and, by extension, the overall economy.
1.Economic health: Trends in housing prices, sales, and construction can signal whether the economy is in expansion or contraction mode. A robust housing market is typically synonymous with a strong economy, as it often reflects strong consumer confidence and spending.
2.Wealth effect and consumer spending: Housing values directly impact individual and household wealth. Rising home values can lead to increased consumer spending and confidence via the wealth effect, while a decline may have the opposite effect.
3.Employment trends: A robust housing market stimulates employment in various sectors such as construction, real estate, and home improvement. Monitoring housing indicators helps gauge the future state of the employment market.
4.Monetary policy: Changes in housing prices and foreclosure rates can impact lending standards and interest rates.
5.Government Policy: Government intervention, such as incentives for homebuyers or housing-related stimulus packages, can be influenced by the state of the housing market.
6.Stock market: Changes in housing demand, home prices, and construction activity can impact the stock prices of companies within housing-sensitive sectors (real estate, banks consumer discretionary).
Figure 1: The chart illustrates a Housing Index which consists of 1) building permits, 2) housing units started, 3) housing units completed.
What are building permits?
Building permits are a key housing leading indicator that provides insights into the future construction activity within a given area. A building permit is an official approval granted by a local government or regulatory authority, allowing the construction or renovation of a building or structure. An increase in permits suggests a positive outlook for the construction industry and may indicate economic growth. Conversely, a decline in permit issuance might signal a slowdown in construction and economic activity.
What are housing units started?
Housing units started (what follows approvals of permits) refer to the initiation of construction on new residential units, including single-family homes and multi-family buildings. The number of housing starts can reflect the confidence of builders and developers in the market. High levels of housing starts may indicate optimism about future demand, while a decline might suggest caution.
What are housing units completed?
Housing units completed refers to the total number of newly constructed residential units within privately-owned housing projects that have been completed within a specific time frame. This metric encompasses the total count of completed housing units, including single-family homes, multi-family buildings, condominiums, and other residential structures developed by private entities. It serves as a key measure of the level of new housing supply entering the market, providing insights into the pace of construction activity and overall housing market trends.
What is the link between the U.S. consumer and U.S. housing trends?
Changes in housing activity, encompassing trends in both buying and selling of properties, are profoundly influenced by consumer sentiment, reflecting the collective outlook, attitudes, and confidence levels of individuals within the housing market. Consumer sentiment serves as a barometer, gauging the overall mood and perception regarding various economic factors, including employment stability, income growth, interest rates, and general economic conditions.
Figure 2: The chart illustrates that the ebb and flow of consumer confidence typically precedes housing activity.
What is the outlook for U.S. housing activity ahead?
There has been an improvement in U.S. consumer sentiment since last year. Perhaps the slowdown in the pace of inflation has contributed to consumer sentiment rebounding since the pronounced decline witnessed from the back half of 2021 through 2022. The rebound in consumer sentiment largely explains housing activity picking up after the cooldown that took place in 2022 in the wake of higher interest rates.
It’s important to monitor the ongoing evolution of U.S. consumer sentiment to gauge the potential outlook for housing over the coming months.
Figure 3: Close up of Figure 2.
What does an improvement in housing mean for broader economic indicators?
An increase in housing indicators is often viewed as a positive sign for the economy, indicating growth and confidence in the housing market. The construction industry has a significant impact on the economy, contributing to job creation and spending on materials and services, influencing broader economic trends.
Figure 4: U.S. Housing Activity Index as a leading economic indicator (three quarters) of the U.S. unemployment rate.
It takes roughly three quarters for inflection points in the housing industry to impact employment indicators, like the U.S. unemployment rate.
The improvement in housing activity of the last few quarters paints a more optimistic picture for the U.S. unemployment rate ahead (note that the U.S. unemployment rate is inverted on the scale, so higher on the scale means lower).
Figure 5: Close up of Figure 4.
A closer look at the relationship between housing and another indicator of the labor markets, initial jobless claims (inverted below), also reveals that there’s not as much risk for the U.S. labor markets as there was last year. Specifically, the well-established slowdown that took place in housing in 2022 sowed the seeds for a slowdown in employment trends a few quarters later. This relationship implies that initial jobless claims, which have remained relatively subdued, would not likely surge if housing data keeps improving.
Figure 6: U.S. Housing Activity Index as a leading economic indicator (three quarters) of U.S. initial jobless claims.
What are other indicators of housing activity?
Interest rates have a significant impact on housing activity by affecting mortgage affordability, homebuyer demand, refinancing behavior, new construction projects, and overall market sentiment. The relationship between interest rates and the housing market makes monitoring interest rate trends an essential aspect of understanding and predicting housing activity.
Figure 7: Interest rates (30-year yield) as a leading indicator (six months) of the U.S. Housing Activity Index.
It takes just a few months for changes in interest rates to be fully reflected by U.S. housing activity. For instance, in periods of declining interest rates, homebuilder sentiment tends to strengthen as the cost of borrowing declines and risk appetite rises for developers and potential homebuyers. The same holds true in reverse.
Figure 8: Close up of Figure 7.
How do interest rates foretell trends in the housing industry?
Interest rates play a crucial role in influencing housing activity, including homebuying and construction.
1.There is typically an inverse relationship between interest rates and mortgage affordability. When interest rates are low, the cost of borrowing is lower, making mortgages more affordable for homebuyers. Lower interest rates allow homebuyers to qualify for larger loan amounts with the same monthly payment, increasing their purchasing power in the real estate market.
2.Lower interest rates often stimulate demand for homes as more potential buyers are attracted by the affordability. This increased demand can lead to higher home sales and a more active housing market. Conversely, rising interest rates can have the opposite effect, potentially dampening demand as higher borrowing costs may limit affordability for some buyers.
3.Changes in rates can also influence refinancing activity. When interest rates are low, homeowners may be incentivized to refinance their existing mortgages to secure lower monthly payments, freeing up disposable income. Refinancing can impact consumer spending habits and overall economic activity, as households with lower mortgage payments may have more discretionary income.
4.Developers and builders are sensitive to financing costs. Lower rates reduce the cost of borrowing for construction projects, encouraging new residential development. Lower rates can also boost investor sentiment in the real estate market, leading to increased investment in new construction projects.
5.Interest rates can influence market sentiment and perceptions of economic stability. Stable or declining interest rates may contribute to a positive sentiment, while rapidly rising rates can create uncertainty and caution in the housing market.
Disclosure: Important Notice for Readers
The content provided in this paper is intended for informational purposes only. The information presented here is believed to be accurate at the time of writing. It is crucial to recognize, however, that economic data is dynamic and subject to change.
The historical data, economic updates, and analyses provided in this paper are for reference purposes only. It is essential to understand that what occurred in the past may not necessarily be predictive of future movements.
Readers are encouraged to independently verify and validate the accuracy of the content and consider their unique circumstances before acting on any information presented in this paper.
The information and publications provided are not intended to be, and should not be considered, financial, investment, trading, or similar advice. The material supplied is not meant to guide decisions regarding the purchase or sale of securities or any financial products. I strongly urge you to conduct your own research and due diligence before making any investment decisions.
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