Housing Market Edges Toward Post-Recession Highs By Sara Potter, CBE, VP, Markets Analysis, FactSet
With this week’s release of US housing starts data for June, we registered the strongest quarter in the housing market since 2007. June starts came in at a seasonally adjusted annual rate of 1.189 million units, well above the 1.168 million units forecast by analysts surveyed by FactSet.
Looking further ahead, housing starts are projected to show solid growth over the next two and a half years, reaching a post-recession high of 1.37 million in 2018. This figure is about one-third less than the peak seen during the housing bubble (2005).
Signs of Cautious Optimism
Both home builders and equity markets appear to be buying into the strength of this housing market, although not in equal measure. The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) has been rising steadily since 2012 and the 12-month moving average is currently at a 10-year high.
At the same time, FactSet’s calculated price index of US home builders has remained relatively flat since early 2013; the index showed some weakness in early 2016 following the Federal Reserve’s December 2015 rate hike, but as the likelihood of future rate increases has fallen, the index has recovered and is up 4.5% year-to-date.
Note that so far this year this industry is still underperforming the S&P 500, which is up 7.6% year-to-date.
Interest Rate Outlook
The interest rate outlook remains mostly positive with respect to the housing market. In the wake of the June Brexit vote, the US yield curve shifted lower as funds flowed into US treasuries in a global flight to quality. In the weeks since the Brexit referendum, interest rates have recovered somewhat as US economic data continues to show strength in the US economy. Analysts surveyed by FactSet continue to project a rate hike in the second half of 2016. However, mortgage rates continue to trend lower, with 15-year fixed rates hovering below 2.7% and 30-year rates around 3.4%, the lowest we’ve seen since the spring of 2013.
One concern in this week’s housing data release was the flattening of applications for building permits, which necessarily lead housing starts. The monthly permits data has been quite volatile over the past 18 months, but on a 12-month rolling basis we can see a slight downward trend emerging this spring. This easing in permits may be due to constraints in the industry. In the latest HMI survey, home builders reported shortages of both lots and labor. Data from the US Bureau of Labor Statistics’ Job Openings and Labor Turnover Survey (JOLTS) shows strong growth in job openings in the construction industry in 2016; however, the ratio of actual hires to job openings has been steadily declining since the recession, indicating a lack of qualified job applicants. One side effect of the tight construction labor market is accelerating wage growth in the industry.
Looking forward, the fundamentals to support growth in the housing market appear strong. The economy continues to add jobs, which is helping to support household formation, home prices are rising, and there is a favorable interest rate environment. However, in the aftermath of the housing market collapse, this economic recovery has consistently seen this housing market underperform compared to expectations.
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