Too small a bounce: Why is the US housing market holding back?

Market Realist

Must-know releases shaping bonds and stocks this week (Part 4 of 9)

(Continued from Part 3)

The housing market

The housing market once again derailed market expectations, according to the National Association of Home Builders and Wells Fargo. NAHB chief economist David Crowe said , “A number of factors are raising builder concerns over meeting demand for the spring buying season.” Crowe explained, “These include a shortage of buildable lots and skilled workers, rising materials prices and an extremely low inventory of new homes for sale.”

What is the NAHB-Wells Fargo Housing Market Index (or HMI)?

Conducted every month, the Housing Market Index (or HMI) is a monthly survey designed to gauge builders’ perceptions of current single-family home sales. The survey asks homebuilders to rate the present market conditions of new homes sales and the sales expectations for the next six months as “good,” “fair,” or “poor.” Homebuilders’ expectations on the six-month sales traffic of prospective buyers are rated as “high to very high,” “average,” or “low to very low.” Once the responses are collected, the diffusion index calculates the responses after adjusting for seasonality. Based on this calculation, the HMI can range between 0 and 100. A number above 50 indicates improvement in the housing market.

The HMI index for March continued to be affected by poor weather and a shortage of skilled labor.

What did the latest reading indicate?

March 2014 readings suggested serious weakness in the traffic of prospective buyers, at 33 versus February’s 31. The major drawback was the lack of first-time homebuyers. After a sharp decline in February—almost 10 points down—the housing market index only nudged up 1 point in the March reading.

Single-family sales: Present and six-month

Single-family sales’ present monthly growth was at 52—barely a 1 point gain from February, and continuing to lag January’s growth at 62. The six-month expectation index shows a slowdown in single-family home sales, at 53 compared to 54 in February.

Despite the fact that last month’s housing price index showed home price appreciation across the U.S.—an important barometer to drive housing sales, some regions (especially the Northeast and West) posted declines in home sales. However, as you can see in the chart above, the Northeast is by far the slowest region for new home building.

How did markets react to housing data releases?

Housing data releases are important economic indicators. Buying a home is a large investment and one of the greatest indicators of consumer confidence. Consumers need to feel comfortable about their financial position in order to buy a house. Since consumption makes up over 70% of the economy, an improvement in these indicators will imply that the overall economy is improving and that the stock markets (SPY) are growing. Increases in home sales also have a ripple effect in the economy. Buying a home not only profits homebuilders and realtors such as Pulte Homes, Inc. (PHM) and Lennar Corporation (LEN) but can also benefit home furnishing companies like Design Within Reach Inc. (DWRI).

Other factors remaining equal, a decrease in housing activity shows economic contraction, which could force the Fed to continue with its economic stimulus policies. This would mean interest rates would drop and bond prices (BND) would increase.

Continue to Part 5

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