At a Glance
- Construction data, Fed rates and commodity markets combine to tell the story of housing. What does that tell us about overall economic health?
Economies and houses are both established on solid foundations, and the relationship between the two means that housing market numbers are part of the daily information diet for investors and traders.
People spend big money not only on their homes, but also what goes in them, which means that housing data can be a leading indicator of economic activity months in advance. The total value of the U.S. housing market in 2018 was $33.3 trillion, up 6.2 percent from 2017, according to Zillow Group.
The housing market represents about 15 percent to 18 percent of U.S. GDP, said Lindsey Bell, Investment Strategist at CFRA, citing figures from the National Association of Home Builders. “In other words, a weak or strong housing market can have substantial influence on the direction of the overall economy,” Bell added.
In early 2019, the U.S. housing market appeared poised for continued, if somewhat tempered, strength – with a few caveats: the potential for higher interest rates, ongoing home price increases and tight housing supplies, analysts said. The following factors and questions are worth watching:
Housing Starts Take a Tumble
Released monthly by the U.S. Census Bureau, housing starts and building permits are among the most widely-followed indicators. Stronger- or weaker-than-expected starts often move equity, bond and commodity prices.
In December, housing starts dropped 8.2 percent nationwide from the same month a year earlier, the largest percentage drop in over two years. The December decline followed two months of strong gains. Still, analysts say they’re watching this gauge closely for any extended weakness.
Why? Builders usually don’t start a house unless they are reasonably confident it will sell upon or before its completion, for one reason. “Sharp declines in housing starts have been a key indicator of each recession since 1960,” Bell said.
House Value Gains Are Slowing, But Still Trending Up
Climbing interest rates in recent years have made mortgages costlier and contributed to slower increases in home values.
In 2019, average U.S. home values are expected to rise 3.8 percent from 2018, Zillow said in a December report, citing a survey of economists conducted by Pulsenomics LLC (that projection was revised down from a previous estimate for a 4.2-percent increase).
In October, the U.S. median home price was $221,500, up 7.7 percent from the same month a year earlier, Zillow said.
The S&P CoreLogic Case-Shiller Home Price index, which tracks existing home values in 20 U.S. metropolitan regions, also showed price pullbacks late last year. In the most-recent report, the Case-Shiller 20-city composite index was up 5 percent in October, compared to the same month in 2017. That was down from the 5.2 percent year-over-year gain in September.
“The combination of higher mortgage rates and higher home prices, rising faster than incomes and wages, means fewer people can afford to buy a house,” David M. Blitzer, Managing Director at S&P Dow Jones Indices, said in the report. “Reduced affordability is slowing sales of both new and existing single-family homes.”
What’s the Outlook for Mortgage Rates and The Fed?
The Federal Reserve hiked its benchmark short-term funds rate four times in 2018 as the U.S. economy gained strength. The Fed’s current tightening cycle, which started in late 2015, has pulled longer-term rates higher, including those for home mortgages.
At the end of January, fixed rates for 30-year mortgages averaged about 4.46 percent nationwide, up from 4.2 percent a year earlier, but down from nearly 5 percent in November, when rates reached the highest levels since early 2011, according to the St. Louis Federal Reserve.
Traders in Fed Funds futures are not expecting any additional rate hikes in 2019, as of early February, according to CME Group’s FedWatch tool. If the Fed holds rates steady, mortgage rates may follow.
What about Supply and Demand?
For the last couple years, tight inventory has been the most important metric supporting home prices, said John H. Dolan, a consultant and an independent market maker for CME Group futures contracts based on the S&P Case-Shiller home price indices.
Lower-priced homes, depending on the region, typically led the broader U.S. housing market in recent years, Dolan said. “That’s been very much the story over the past two years, and it will continue to be. I don’t see anything to cause new supply to reach the low-price sector any time soon.”
For some high-end markets, supplies could tick higher, as some people decide to put their homes up for sale, Dolan added. Overall, “it’s going to continue to be very much a ‘tiering’ story in markets, with the lower-end doing better than upper-end,” he said.
China and Other Big-Picture Economic Matters
Keep an eye out for the “elephant in the room,” Dolan said – aka, China. If China’s economy, the world’s second-biggest next to the U.S., continues to slow, that probably will keep a lid on interest rates, if not send rates even lower, he said.
If China’s growth continues to erode, the country could take steps to weaken its currency, the yuan, to stimulate exports, Dolan noted. That’s another potential wild card that could tamp down U.S. rates.
Lumber and Other Housing Costs
Lumber prices have fallen sharply after rallying to record highs last spring in the wake of U.S. antidumping duties placed on Canadian imports. Lower Chinese demand and tariffs on U.S. goods played a role in the price decline as well.
At the end of January, CME lumber futures for March delivery settled at about $416 per thousand board feet. Lumber futures rallied much of January, but the nearby contract was still down about 35 percent from last May, when the price reached $639, the highest settlement since the contract was launched in 1969.
Wood is just one of many things that go into a new house – along with other materials like concrete and copper wiring and the land upon which the house is built.
Softwood lumber costs to build a new, single-family home in the U.S. averaged about $18,171 in October, according to the National Association of Home Builders. During the same month, single-family home prices averaged about $395,000 nationwide, the association said.
Perhaps the most significant input, especially now, analysts say, is labor, which is in increasingly tight supply with U.S. unemployment near a 50-year low. All factors bear watching for market professionals trying to get a handle on the housing market’s next move.