Housing Market as an Investment Indicator: Keeping an Eye on the Foundation

The housing market has historically been a bellwether of the stock market and of the economy in general. Learn about housing starts, building permits, and other indicators that can help investors assess the state of the housing market.

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Key Takeaways

  • Housing data can be a leading indicator of the overall U.S. economy
  • Many professional investors follow housing starts, new home sales, and other monthly reports

The U.S. housing market has long been a bellwether of the stock market and the overall U.S. economy for several reasons. People spend a lot of money, not only on their homes, but also on what goes inside or right outside: appliances, decor, furniture, landscaping, and more.

A home is usually a consumer’s or household’s largest purchase, and consumer spending accounts for approximately 70% of the U.S. economy, noted Sam Stovall, chief investment strategist at CFRA. According to Zillow Group, the total value of the U.S. housing market was $33.3 trillion in 2018, up 6.2% from 2017.

“Consumers will likely be reluctant to buy a home if they’re concerned they might lose their job or cannot keep up with payments,” Stovall said. Conversely, optimism over personal income, the job market, or the economy may make people more inclined to buy a home. “As a result, home buying is a reflection of consumer confidence,” he added.

The government, along with research and trade groups, release various housing-related figures every month. Some numbers are more meaningful and market-moving than others. The following indicators are among the most widely followed by professional investors and traders to assist in housing market forecasts, predictions, and trends.

Housing Starts and Building Permits

Starts and permits tend to be among the most market-moving housing indicators, often sending bond or equity prices higher or lower after the numbers are released each month by the U.S. Census Bureau. That’s because of the “ripple effect.”

Housing starts are registered at the beginning of construction and reflect the commitment level of builders, who usually don’t break ground for a new house unless they’re confident they can sell it. New homes require construction workers, and once someone buys a house, other purchases follow. If housing starts come in lower than expected, for example, bond prices may rally due to concern over slowing economic growth (bond prices move inversely to bond yields). By contrast, stronger-than-expected housing starts may send bond prices lower (and push shares of homebuilders higher) because a growing economy raises the prospect of higher inflation, which erodes the value of bonds and other fixed-income investments.

Housing starts may also ring alarm bells for an impending recession. According to Stovall, each of the eight U.S. recessions since 1960 was preceded by a double-digit, year-over-year percentage decline in housing starts, including a 37% drop ahead of the 2007–09 recession. See figure 1 for a look at the apparent correlation between the housing market and the economy. But remember, history doesn’t always repeat itself.

FIGURE 1: HOUSING STARTS AND RECESSION. The shaded sections, which show recessionary periods, seem to demonstrate the link between economic growth and housing trends. Although some pullbacks in housing starts have been minor compared to others, each of the last eight recessions was preceded by a fall in housing data. Data source: U.S. Census Bureau. Chart source: the thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

New and Existing Home Sales

The Census Bureau also compiles new home sales, which measure the number of sales “commitments” of newly constructed homes during a month. Because at least a few hundred thousand households purchase new homes every month, the economic ripple effect can be substantial, according to Michael Kealy, education coach at TD Ameritrade.

Kealy suggested keeping an eye on trends in new home sales because the data “can offer clues as to the outlook for homebuilder stocks, as well as those of mortgage lenders, big-box ‘DIY’ companies, and manufacturers and sellers of home furnishings.”

“Housing data can be notoriously volatile, swinging sharply from one month to the next, and the new home sales report is a prime example,” Kealy said. Existing home sales (also known as home resales) account for a larger share of the market than new homes and can also be a harbinger of broader housing market trends, for similar reasons as housing starts and building permits.

In this report, the National Association of Realtors (NAR) tallied the number of previously constructed homes, condominiums, and co-ops for which a sale closed during the month. Existing home sales accounted for more than 90% of total home sales, according to NAR.

Existing home sales, along with prices, can provide a snapshot of what’s happening in the market, as well as what trends and challenges face the market both nationally and in certain regions, according to NAR.

S&P CoreLogic Case-Shiller Home Price Indices

All real estate is local, as the old saying goes. Every neighborhood, city, and state has its own unique characteristics and dynamics linked to jobs, schools, taxes, transportation, and many other factors, meaning home price patterns vary widely depending on location.

Want to get housing data on the thinkorswim® platform from TD Ameritrade? 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. 

Still, home prices, broadly and over the long term, do influence consumer sentiment and behavior and factor into broader economic health.

The S&P CoreLogic Case-Shiller Home Price Indices are used to gauge home value trends and other factors, such as how consumers are responding to interest rates. The readings track monthly changes in the value of residential real estate in 20 U.S. metropolitan regions (and the country as a whole), based on prices for existing single-family home resales.

Mortgage Rates and the Fed

The Federal Reserve’s interest rate policy directly affects rates for mortgages and most other forms of commercial and consumer debt.

By looking out for Fed announcements about changes to the central bank’s benchmark rates, and by watching broader trends in mortgage rates (easily available via a quick search), you can get a handle on a few key questions such as whether it’s a good time to buy a home or refinance an existing mortgage.

For example, the Fed hiked the federal funds rate four times in 2018, but by the middle of 2019, expectations grew among market professionals that the Fed would cut its benchmark rate. Kealy noted that the outlook for “easier” Fed policy helped push mortgage rates lower, according to data from the St. Louis Federal Reserve. See figure 2.

30-year mortgage rates
FIGURE 2: 30-YEAR MORTGAGE RATES. Amid signs of a slowing economy and a softening of Fed policy in 2019, rates on the 30-year mortgage fell from nearly 5% to below 4% within a six-month period. Data source: FRED® database. Chart source: the thinkorswim platform from TD Ameritrade. 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. For illustrative purposes only.

Kealy pointed out that using mortgage rates as a housing indicator can be a bit of a double-edged sword: “On the one hand, lower mortgage rates can increase home buyers’ purchasing power, as lower rates mean lower monthly payments. On the other hand, if rates are falling due to deteriorating economic conditions, the housing market may still suffer, as consumers may pull back and become more cautious about large purchases.”

Just as a house is built atop a solid foundation, the U.S. economy rests on a foundation of robust capital markets, consumer strength, and steady growth in employment and productivity. But like your home’s foundation, the economy is subject to occasional cracks and leaks. Routine inspection of housing market indicators and housing trends can help you be prepared for whatever Mother Nature might send your way.

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Key Takeaways

  • Housing data can be a leading indicator of the overall U.S. economy
  • Many professional investors follow housing starts, new home sales, and other monthly reports
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