We’re going to look at the state of housing today, but first, let’s check in with the stock market to see where things currently sit.
During the last couple of weeks, we’ve been watching the development of what looked like a head and shoulders pattern in the S&P 500. Fortunately, we did not see a break below the neckline, which would have confirmed the pattern.
Instead, the market rallied off of the neckline support and headed higher, approaching the 2100 level. This has been a formidable area of resistance for quite some time and could put some pressure on last week’s rally.
The end result is more sideways action, with the S&P beginning to trace out a new, tighter trading range. While this may not provide an opportunity for investors, it’s a nice break from the major swings we’ve seen recently.
Housing plays an important role in our economy but doesn’t receive as much attention as some volatile components of the financial markets.
Estimates by the National Association of Home Builders (NAHB) suggest that housing’s combined contribution to GDP runs between 15-18%.
The contribution occurs through two different means: Residential investment (3-5% of GDP), which includes construction, remodeling and the production of manufactured homes. And consumption spending on housing services (12-13% of GDP), which includes gross rents as well as owners’ imputed rents.
This makes housing a small but integral aspect of the broader economy.
To begin, let’s take a look at the current year-over-year growth rate in housing, as measured by the S&P/Case-Shiller 20-City Composite Home Price Index (chart below).
Here we can see that for the last year and a half, home prices have been steadily rising by about 5% per year. The latest reading (as of March … this data tends to lag) shows home prices up 5.4%.
Of course, this is a national average; specific growth rates for the 20 major metropolitan areas can be found in the table below. In general, the Pacific Northwest is seeing the strongest appreciation.
Home prices move in a very cyclical manner, which is evident in this next chart. Here we are looking at the same Case-Schiller Index, but we’re looking at the aggregate index level, not its growth rate.
This particular chart is not seasonally adjusted because I want to highlight the seasonal ebb and flow of home prices.
Each squiggle that you see in this chart (they’re more pronounced on the right side) occurs over a one-year period. The troughs (low points) nearly always occur in March, while the cyclical highs nearly always occur in August.
This should make sense intuitively since many families view the summer as the optimal time to move with the kids out of school. While this has a little bearing from a macroeconomic perspective, you may want to keep this in mind for timing future home sales/purchases. Buying in the winter can save you a few bucks while selling in the summer can fetch you a little something extra.
If we were to smooth out all of those fluctuations, we see that home prices have been rising steadily for some time. With longer-term interest rates remaining anchored, thereby keeping mortgage rates low, and job growth remaining steady, it’s reasonable to assume this trend will continue awhile longer.
According to S&P Dow Jones Chairman David Blitzer, the price gains are being heavily driven by low inventory. The percentage of homes on the market compared to the number of households in the US is currently at the lowest level since the 1980s.
It’s no surprise that many people are opting to hang onto their homes considering they’re rising by over 5% per year. In this low-interest rate/high stock price environment where gains are difficult to come by, 5% sounds rather enticing.
Before moving on, I want to point out that the recent rise in home prices (particularly since the beginning of 2012) has not been matched by a proportional increase in mortgage debt.
The chart below, provided by Freddie Mac, demonstrates a substantial rise in US home equity (green area) as a result. This could facilitate increased (or at least steady) consumer spending moving forward. Let’s just hope not everyone decides to cash out and buy a boat like they did during the run up to the last housing crisis.
Along with low inventory levels, rental vacancy rates have also been falling. The current rental vacancy rate for the US is 7%, as measured by the US Census Bureau. This typically leads to rising rents, which we’ve been seeing lately.
The state of available inventory for both home sales and rentals can be summarized in this next chart, also courtesy of Freddie Mac.
Here, the benchmark (zero line) represents a baseline average calculated during the 10-year period from 1994 – 2003. This allows us to see the major rise in inventory that occurred into and during the aftermath of the housing bubble.
It also highlights the tight market conditions that are currently in place. It’s a seller’s market in terms of home sales, and a landlord’s market in terms of rentals.
All together this points toward continued resiliency in the housing market. That view is further backed up by two housing-related leading indicators: housing starts and building permits.
Below we can see that both housing starts and permits remain in an uptrend (a good sign for the broader economy) but that actual construction levels remain suppressed at levels last seen back in the early 90s.
This suggests that demand for housing will continue to outpace supply, likely leading to further home price appreciation in the months ahead.
The two areas we’ll want to keep our eyes on moving forward are job growth and the prevailing level of interest rates. These are the two largest drivers of home price affordability and a sharp change in either one could foreshadow an end to this period of steadily rising home prices.
The preceding content was an excerpt from Dow Theory Letters. To receive their daily updates and research, click here to subscribe.
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