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Housing Data Can Be a Leading Indicator for Fed, Economy

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August 30, 2016
Home building stocks continue strong as new home sales increase.

In case you missed the news, new home sales surged 12.4% in July to an annualized rate of 654,000. That marked the strongest pace of new home sales since October 2007. 

Why you should care: JJ Kinahan, chief market strategist at TD Ameritrade, calls home sales data, both new and existing, significant measures of consumer confidence and potentially leading indicators for the economy and the Federal Reserve’s monetary policy. 

Market twist: Home building stocks are a net beneficiary, Kinahan adds. For example, PulteGroup Inc. (PHM) is up 19% year-to-date. Other homebuilders include D.R. Horton Inc. (DHI), Lennar Corporation (LEN), Toll Brothers, (TOL), and KB Home (KBH). 

Sam Stovall, managing director at S&P Global Market Intelligence, agrees that home sales data are a significant economic indicator. "Why would people make the biggest investment of their lives if they’re worried about losing a job or nervous about the economy," he says. 

Digging deeper: The latest numbers showed home buyers out in full force, as the pace of sales beat economists' estimates in July. The still ultra-low mortgage rate environment, along with strong labor market and also pent-up demand in the wake of the Great Recession remain underlying bullish factors for the housing market. 

Snapshot of July new home sales data:

1.      Sales strength was driven by a 40% increase in new home sales in the Northeast and 18% increase in the South region, according to Briefing.com analysis.

2.      Increased sales activity occurred at both ends of the new home market. Homes priced under $300,000 accounted for 52% of sales in July versus 48% in June. Homes priced over $750,000 accounted for 4% of homes sold versus 3% in June, according Briefing.com.

3.      At the sales pace in July, inventory of new homes dropped to 4.3 months of supply from 4.9 months in June, says Briefing.com

4.      The key takeaway is that it’s an encouraging reading for the homebuilding companies and an encouraging sign for the U.S. economy, says Briefing.com.

What About The Fed?

The speech last week from Fed Chair Janet Yellen in Jackson Hole, Wyoming, reignited speculation the September meeting could be "live" from an interest rate hike perspective. Even if the Fed were to hike rates by 25 basis points in September, Kinahan downplayed the likely impact on the housing market. For now, expected rate hikes aren't expected to derail the housing market. 

"One quarter of a point over a 30-year mortgage just isn't that much of a difference," Kinahan says. 

"Investors should not fear that the Fed is leaning towards raising rates," Stovall says. "Focus on the relative level of interest rates and the overall health of the economy," he says. For perspective, Stovall remembers the Fed's 2004-2006 tightening cycle: "Housing stocks outperformed the broader market then," he says. 

Stovall also keys in on the housing market as a leading indicator of recession. He points to the current robust housing market strength as "one of the reasons I don't think the U.S. is heading toward a recession now." 

"Since the late 1950's, only one recession was not preceded by a 30% year-over-year decline in housing starts and that one instance was the shallowest recession since the Great Depression," Stovall says. 

Recent data: Housing starts in July were up 2.1% to a seasonally adjusted annual rate of 1.211 million units. While starts have leveled off somewhat following the big rising trend off the post-recession low, the data remain in positive territory. See figure 1 below.

FIGURE 1: HOUSING STARTS CLIMB 2.1% IN JULY.

Housing starts and building permits have been climbing since the financial crisis in 2009, but remain well off the highs from the 2004 to 2006 period. Data source: Census Bureau. Image source: Briefing.com. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

TD Ameritrade clients can dig deeper into the housing data with a new economic research tool in the thinkorswim platform. Go To Analyze > Economic Data > House Price Indexes. Clients can explore many aspects of the housing market including the affordability index and house price indexes for various regions of the country. For instance, the chart in figure 2 is of the S&P/Case-Shiller 20-City Composite Home Price Index©. 

FIGURE 2: S&P/CASE-SHILLER 20-CITY COMPOSITE INDEX.

Tracking economic data like the home price index in the thinkorswim platform is now just a few clicks away. Click on the Analyze tab and then click Economic Data to find a library of economic data ready to analyze. Data source: Federal Reserve Bank of St. Louse. Image source: the thinkorswim® platform by TD Ameritrade. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.