Housing and Economic Health: The Most Important Housing Market Indicators

Housing market data, like existing home sales and housing starts, can impact stock and bond prices. Investors and traders should know when the most widely followed reports are released.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/Miniature house on top of printed stats: Housing starts, sales, and trends
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Key Takeaways

  • The housing market is a widely followed economic bellwether that can move stock and bond prices

  • Housing starts and building permits are two of the most closely watched housing numbers

  • Investors can apply their understanding of the housing market toward portfolio strategy in a few simple ways

For gauging the health of the economy, there’s no place like home. Housing data has long been scrutinized by professional investors and traders seeking clues to the economy’s direction. Certain numbers, like housing starts and existing home sales, can move equity, bond, and commodity prices. Retail investors can similarly incorporate an understanding of housing numbers into trading decisions or portfolio strategy.

Housing, particularly residential real estate, “is a critical leading economic and market indicator,” said Michael Fairbourn, education coach, TD Ameritrade. “Housing numbers offer a window into other industries and business sectors, including banking, construction, energy, home improvement retailers, and other areas.”

As the COVID-19 pandemic illustrated, home is much more than a place to hang your hat; it’s increasingly where we work, play, teach, and learn. Investors can study the housing market in many ways: through government housing reports, stocks of homebuilders and so-called real estate investment trusts (REITs), and even lumber futures. Here’s a primer on the housing market and some of the most widely followed housing indicators.

Why Is Housing Market Data Important?

Follow the money. In 2020, the total value of the U.S. housing market was $36.2 trillion, up 7.4% from 2019, according to Zillow Group. People spend sizable amounts on their homes and what they put in them, and because consumer spending accounts for upward of 70% of U.S. gross domestic product (GDP), housing can be a bellwether of retail sales and other economic activity months in advance.

The housing sector “is among the first sectors to weaken when the economy approaches recession and also one of the first to bounce back when the economy turns up,” Fairbourn noted.

Housing Starts and Building Permits

“Many housing numbers are lagging or backward-looking because they reflect completed transactions from months prior. By contrast, the ‘ripple effect’ of housing starts and building permits make these two figures among the most market-moving housing indicators,” Fairbourn explained.

Housing starts “are both a production harbinger for the economy and a barometer of builder sentiment,” he added. Starts, combined with permits, “are one of the best indicators of real economic activity.”

Starts are registered at the onset of construction (defined as the beginning of excavation of the foundation) of a house or apartment building. Building permits, registered with a government authority, typically precede starts by a month or two. Both starts and permits are released in the same monthly report from the U.S. Census Bureau, and numbers are expressed in terms of seasonally adjusted annual rates.

In January, U.S. housing starts decreased 6% to a seasonally adjusted annual rate of 1.58 million units. Permits rose 10.4% to a rate of 1.881 million units. You can find housing starts data on the thinkorswim® platform. Select the Analyze tab > Economic Data, and then enter HOUST:FRED in the symbol box (see figure 1).

FIGURE 1: LEADING INDICATOR? Housing starts decreased in January 2021 after a significant rise since April 2020. You can find hundreds of housing data points on thinkorswim on the Economic Data tab, which can be found under the Analyze tab. Data source: the Federal Reserve FRED database. Chart source: The thinkorswim platform. For illustrative purposes only. Past performance does not guarantee future results. FRED® is a registered trademark of the Federal Reserve Bank of St. Louis. The Federal Reserve Bank of St. Louis does not sponsor or endorse and is not affiliated with TD Ameritrade.

New Home Sales and Existing Home Sales

New home sales, also compiled by the Census Bureau, measure the number of newly constructed homes with a “committed” sale during a month. Existing home sales (also known as home resales) from the National Association of Realtors are the number of previously constructed homes, condominiums, and co-ops for which a sale closed during the month.

“New home sales comprise only about 15% of overall U.S. home sales but carry outsized economic impact in terms of job creation, investment activity, and economic production,” Fairbourn said.

In February, the National Association of Realtors reported existing home sales in 2020 rose 5.6%—the highest pace since 2006.

S&P CoreLogic Case-Shiller Home Price Indices

Home price trends over the short and longer term influence consumer sentiment and behavior and factor in to broader economic health. That’s one reason the S&P CoreLogic Case-Shiller readings are among the most widely followed U.S. residential real estate price benchmarks.

S&P CoreLogic Case-Shiller Home Price indices track monthly changes in the value of residential real estate (based on existing home prices) in 20 U.S. metropolitan regions and the country as a whole.

Hindsight may be 20/20, but history is worth remembering. The S&P CoreLogic Case-Shiller Home Price Index climbed steadily from the mid-1990s to mid-2000s before hitting a then-peak in the summer of 2006. A real-estate bubble was about to burst, triggering the Great Recession of 2007–09.

In the most recent report, the S&P CoreLogic Case-Shiller 20-city composite index rose 9.5% in November compared to the same month in 2019. That was slightly stronger than the 8.4% year-over-year gain in October. To get the Case-Shiller data on thinkorswim, under the Analyze tab, select Economic Data > Prices > House Price Indexes. From there, you can access all the Case-Shiller data—national, regional, and local—and hundreds of other housing numbers (see figure 2).

FIGURE 2: TRACKING RESIDENTIAL REAL ESTATE VALUE. Pull up the S&P CoreLogic Case-Shiller Index, plus other housing data points such as existing home sales, from the Economic Data tab in thinkorswim. Data source: the Federal Reserve FRED database. Chart source: The thinkorswim platform. For illustrative purposes only. Past performance does not guarantee future results. FRED® is a registered trademark of the Federal Reserve Bank of St. Louis. The Federal Reserve Bank of St. Louis does not sponsor or endorse and is not affiliated with TD Ameritrade.

Homebuilders, Home Improvement, and Other Housing-Related Stocks

Publicly traded homebuilders are among the most direct ways to gain exposure to, or at least follow, the housing market. These companies include D.R. Horton (DHI), LGI Homes (LGIH), Lennar (LEN), PulteGroup (PHM), and Toll Brothers (TOL).

Other housing-related sectors are more about the stuff people put inside their homes, including home improvement chains like Home Depot (HD) and Lowe’s (LOW), as well as appliance, furniture, or electronics retailers, such as Best Buy (BBY), Laz-Y-Boy (LZB), and Whirlpool (WHR).

A few other potentially intriguing angles include publicly traded REITs, several of which are linked to the residential sector, and CME Group’s lumber future contract (/LBS), which is based on a type of wood commonly used to build homes (lumber futures reached a record high in late February amid strength in homebuilding).

How Do Markets React to Housing Data?

“Looking across the spectrum of regularly reported economic indicators, housing starts and related housing numbers rank around ‘medium’ in terms of price impact for bonds and equities,” said Fairbourn. (Monthly employment figures, for example, tend to carry the biggest market impact.)

“Stronger-than-expected housing starts may trigger a rally in equity prices based on expectations that accelerating economic growth will boost corporate earnings,” he added. At the same time, Treasury prices may slide over concern about rising inflation and/or higher interest rates (or less-accommodating monetary policy from the hands of the Federal Reserve; bond prices move in the opposite direction as rates).

Conversely, weaker-than-expected starts may push equity prices lower and bond prices higher, amid prospects for a slower economy and lower interest rates.

Whether you’re an active trader, long-term investor, young saver, retiree, or anything in between, you’re likely connected to the housing market as an owner or renter. For many Americans, home equity represents a large chunk of the nest egg. And from a fundamental standpoint, housing market trends are directly connected to consumer spending, which accounts for roughly 70% of the economy.

Bruce Blythe is not a representative of TD Ameritrade, Inc. The material, views, and opinions expressed in this article are solely those of the author and may not be reflective of those held by TD Ameritrade, Inc.

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Key Takeaways

  • The housing market is a widely followed economic bellwether that can move stock and bond prices

  • Housing starts and building permits are two of the most closely watched housing numbers

  • Investors can apply their understanding of the housing market toward portfolio strategy in a few simple ways

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