With all of the important housing sales reports in for November, let’s take a detailed look at that market.
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. 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.
As a general rule, housing construction is affected first and foremost by interest rates. Even a small change may have major effects. For example, an increase in interest rates from 3% to 4% increases monthly interest payments on mortgages by one-third, e.g., from $600/mo. to $800/mo. That’s a significant enough increase to disqualify a lot of potential purchasers, especially first time purchasers. A similar decrease in rates will have a similar positive effect. Here’s how interest rates (blue, inverted) have fed through into housing permits (red) over the last 4 years:
In general, housing permits have followed interest rates with a 3-6 month lag, although permits never really went negative this year.
The big reason for this is demographics. A move in interest rates might be attenuated, if not negated, by a big increase or decrease in the age group most likely to purchase houses – again, especially those in their late 20s through mid-30s most likely to be purchasing their first home. Here’s Bill McBride, a/k/a Calculated Risk with a graph of this crucial demographic:
Note that both interest rates and demographics have turned positive for the housing market since late spring, albeit only slightly
While in October all data series were positive, in November housing data was mixed. Permits (blue) and existing home sales (brown) were positive YoY, starts (red) and new single family home sales (green) were down YoY, as shown by the graph below:
November single vs. multi-unit housing permits showed that condominiums and apartment construction continued to outperform single family home construction, which is essentially flat:
Part of the reason November looked poor is because November 2013 saw a post-recession high in housing starts. A better look is seen by norming the data to 100 in January 2013. All three series involving new homes are up, but only about 5% to 15%. Existing home sales have fared more poorly, retreating from their level of two years ago:
On Monday, we’ll get the final Case Shiller report of the year. Home prices may be following sales by turning flat. We’ll see then.