Introduction
Housing is a long leading indicator for the economy, typically forecasting conditions a year or more in advance. Although it is not always the case, advances – and especially declines – in housing over the past 25 years (blue in the graph below) have tended to lead advances or declines in the stock market (red, represented below by the Wilshire 5000):
Yesterday, housing permits and starts for August were released, so let’s take a look.
The positive effects of record-low mortgage rates continue
As I say almost every time I report in these numbers, historically, interest rates have led housing sales and starts, which in turn lead prices, which in turn lead inventory. Here’s the updated look at mortgage interest rates since the beginning of 2011, measured YoY, vs. single-family housing permits (the least volatile metric), also measured YoY:
Typically, interest rates have led at turns in the housing market by roughly 3 to 6 months. Here are the absolute values of housing permits (red, left scale) vs. mortgage interest rates (blue, inverted, right scale):
You can easily see that big upward or downward moves in interest rates have marked effects on new housing construction (remember, mortgage rates are inverted, so increases in rates show as declines in the graph).
Since interest rates continue at or near all-time lows and are significantly lower (and therefore positive) since one year ago, we should expect to see good housing numbers.
And that is what we saw again in August:
Housing starts (gold, left scale) are much more volatile and tend to lag permits by a month. While they declined, only the three months of last December through this past February were higher during the entire expansion. Overall permits (blue, left scale) also declined, but also remained at a high level compared with the expansion. Single-family permits (red, right scale) – which, again, are the least volatile of all the metrics – rose to a new 10-year+ high.
Conclusion
In short, record-low mortgage rates are continuing to have a positive effect on the housing market. This new construction will boost the construction sector of the economy for nearly a year to come, with multiplier effects as the contractors spend the incoming money. Subsequently, sectors like major and minor housewares and outdoor landscaping and furniture will also be boosted.
If you believe, as I do, that we are likely to see a workable coronavirus vaccine within the next 6 to 9 months (and perhaps, a much more coherent and effective Federal response), then the positive housing effects will set a floor under the economy by next summer.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
