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Housing Strength: Can Multiplier Effect Get Economy Moving?

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July 21, 2015
Housing Strength: Can Multiplier Effect Get Economy Moving?

The S&P 500 (SPX) is knocking on the door of new all-time highs, leaving investors to scour economic trends for signs of continued improvement. And this week, data showing expected housing strength may just deliver what the bulls are after. Industry economists and analysts point to the so-called multiplier effect—the idea that home sales trickle down via increased spending on everything from lawn mowers to cleaning services.

"When someone buys a new home they often need new furniture, new TVs, and other things to improve their quality of life," says Pat O'Hare, chief market analyst at Briefing.com.

It’s the improving U.S. employment outlook that has kept real estate agents busy at their open houses. Last week's release of U.S. housing starts and building permits data confirmed construction trends are recovering following the cold winter months. In June, housing starts jumped 9.8% to a seasonally adjusted 1.17 million-unit rate, while building permits—a potential sign of future construction demand—rose 7.4% to a 1.34 million-unit rate.

And Actual Sales?

This week ushers in the equally important existing home sales data and new home sales stats (see figure 1). The Briefing.com consensus estimate calls for an increase to 5.4 million existing home sales in June from a 5.35 million-unit rate in May and a jump in new home sales to 550,000 units from 546,000 in May.

The increase in May existing home sales data marked the most properties sold in a month since November 2009 and much of the gain came from an increase in first-time home buyers, the National Association of Realtors (NAR) said. These buyers accounted for 32% of all sales in May, according to NAR data on Briefing.com. Existing home sales can be the more telling component as they represent nearly 90% of selling activity, and broker's commissions earned on existing home sales are factored into the GDP report, O'Hare noted.

Investors will be watching to see if the trend continues. "There's a lot riding on this idea that the economy will gain momentum and that S&P earnings growth will also be able to gain momentum,” says O’Hare. “Investors should be keeping a close eye on these particular reports, which could tell the tale if the U.S. economy is indeed picking up speed.” 

FIGURE 1: IN THE KNOW.

Log in to the thinkorswim® platform. Navigate to the MarketWatch tab > Calendar. Pull up a weekly snapshot and then click on a single day for events listed chronologically. Click on an event—like Existing Home Sales— for a pop-up box with a detailed description, economists’ forecasts, and more. Chart source: TD Ameritrade’s thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

House Hunting?

Investors looking to further track housing health and builder stocks themselves might consider the S&P Homebuilders Select Industry Index.

"Besides picking housing stocks, you can express your opinion through derivatives of housing like home-improvement retailers, appliance makers and mattress firms," says JJ Kinahan, chief strategist at TD Ameritrade.

Higher Mortgage Rates Ahead

The Federal Reserve is widely expected to pull the trigger on one or perhaps two interest rate hikes this year, which in turn could lead to higher mortgage rates for home buyers. That holds implications for housing market traffic and related investments.

"It will be interesting to see what happens when we get the inevitable rate hike from the Federal Reserve. What effect will higher rates have on the housing market?" said Kinahan.

Importantly, "housing typically cues on employment. If employment stays healthy, one would expect housing to stay healthy," Kinahan says.

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