Will the Housing Market Continue to Prop Up the US Economy?
According to a report released by the National Association of Home Building, October's builder sentiment was at its highest level since February of 2018. In addition, the increase in builder sentiment in 2019 has been the largest 10-month increase in over six years. With builder sentiment at such a high level, it is hard to imagine the rest of the economy going through a downturn in the near future.
There are still some contradictions going on in the housing market. Right now, permits for the construction of new homes have hit a post-recession record. However, cash-out refinances are causing concern among technical analysts. These refinanced loans previously hit their peak before the 2008 crash, and they have been increasing to unsustainable levels again.
While September's building permits and housing starts were slightly lower than they were in August, the decline was primarily due to multi-family apartments being constructed at a slower rate and not due to changes to traditional housing. Compared to last year, construction of single-family homes increased in August and September.
For the most part, it seems like smooth sailing for the housing boom in the United States. The Federal Reserve's Beige Book even detailed how strong the housing markets are in cities like Chicago, Boston, San Francisco and Atlanta. Plus, lower rates could juice the market even more.
The Fed Is Encouraging Lower Mortgage Rates
Lower mortgage rates have helped to bring more renters into the marketplace for homes. Younger millennials are also beginning to start families, so they are finally looking to buy homes. This is a good time for home purchases because 30-year fixed mortgages are at 3.69 percent. At the start of this year, the mortgage rate was at 4.5 percent. Last November, the same rate was at 4.94 percent.
In addition to better housing numbers, wages are finally growing at a higher level than inflation. The unemployment rate has dropped to an almost 50-year low. The higher employment level and better wages mean people can finally afford to buy houses.
While financing is already at an exceptionally low level, interest rates could go even lower. The Federal Reserve may continue to drop interest rates in order to prop up the economy. Uncertainty over the trade war, Brexit, a potential recession in Europe and a global slowdown mean that the Fed may lower rates to keep the United States economy from falling into a recession as well. This would cause the 10-year Treasury yield to drop, which influences how low mortgage rates go.
Investors are paying attention to these changes. Home Depot (HD) shares have advanced 38 percent this year because of expectations around home building. Meanwhile, the S&P Homebuilders ETF (XHB) has advanced by 38 percent as well. The S&P Homebuilders ETF is made up of top builders and organizations that earn revenue from the housing market.
Stocks in the Housing Market Soar
Other stocks related to housing are advancing as well. Alexa Pettee recently started the Hoya Capital Housing ETF (HOMZ), and he believes concerns about the housing market declining are generally overblown. Pettee bases his confidence on the Fed's rate decisions and lower mortgage rates. In 2018, Pettee believes the housing market suffered because of higher rates. Now, lower rates are helping the market continue its growth.
Home Depot, Lowe's and other homebuilder-related companies have all enjoyed growth in their stock prices. Lennox (LII) watched its shares grow because of a 7 percent increase in heating and cooling. The company also enjoyed a 12 percent increase in profits, which was a third-quarter record.
Will the Momentum Continue?
The market's momentum is poised to keep growing, but this growth can end up faltering if there are problems with the overall economy. The trade war with China and geopolitical uncertainty can impact the housing market as well. Any weakness in the economy could also cause even more defaults among cash-out refinances, which would impact the economy and availability of mortgages. Additionally, the homebuilder confidence index actually dropped from its 20-month high in October.
Even though the economy faces uncertainties like more tariffs, it has mostly managed to shrug off these concerns. The housing market continued to advance during the last year. If rates remain low, the market may be able to continue its upward trajectory for a while longer. Like all expansions, this one will eventually come to an end. No one can know when the next recession will hit, but investors will most likely have a few more quarters of growth to enjoy for now.
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